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1.1 INTRODUCTION OF TECHNICAL ANALYSIS
Stock market prediction analyses can generally be classified as either
fundamental or technical. Thus, technical analysis is based only on quantifiablemarket data, whilst fundamental analysis includes data related to the marketsituation, time of year, company prospects and so forth. Technical analysis hasattracted a large following amongst trading practitioners but has been criticized inthe past by theoreticians. It should be noted, however, that more recent studies inthe literature have given some support to the technical approach.
The principles of technical analysis derive from the observation of financialmarkets over hundreds of years. The oldest known hints of technical analysisappear in Joseph de la Vega's accounts of the Dutch markets in the 17thcentury.In Asia, the oldest example of technical analysis is thought to be a methoddeveloped by Homma Munches during early 18th century which evolved into theuse of candlestick techniques, and is today a main charting tool.
Dow Theory is based on the collected writings of Dow Jones co-founder andeditor Charles Dow, and inspired the use and development of modern technicalanalysis from the end of the 19th century. Other pioneers of analysis techniquesinclude Ralph Nelson Elliott and William Delbert Gann who developed theirrespective techniques in the early 20th century.
Many more technical tools and theories have been developed and enhanced in
recent decades, with an increasing emphasis on computer-assisted techniques.
General description
Technical analysts seek to identify price patterns and trends in financial marketsand attempt to exploit those patterns. While technicians use various methods andtools, the study of price charts is primary.
Technicians especially search for archetypal patterns, such as the well-knownhead and shoulders or double top reversal patterns, study indicators such asmoving averages, and look for forms such as lines of support, resistance,channels, and more obscure formations such as flags, pennants or balance days.
Technical analysts also extensively use indicators, which are typicallymathematical transformations of price or volume. These indicators are used tohelp determine whether an asset is tresnding, and if it is, its price direction.Technicians also look for relationships between price, volume and, in the case offutures, open interest. Examples include the relative strength index, and MACD.Other avenues of study include correlations between changes in options (impliedvolatility) and put/call ratios with price. Other technicians include sentimentindicators, such as Put/Call ratios and Implied Volatility in their analysis.
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Technicians seek to forecast price movements such that large gains fromsuccessful trades exceed more numerous but smaller losing trades, producingpositive returns in the long run through proper risk control and money
management.
Technical analysis is frequently contrasted with fundamental analysis, the studyof economic factors that influence prices in financial markets. Technical analysisholds that prices already reflect all such influences before investors are aware ofthem, hence the study of price action alone. Users of technical analysis are mostoften called technicians or market technicians. Some prefer the term technicalmarket analyst or simply market analyst. An older term, chartist, is sometimesused, but as the discipline has expanded and modernized the use of the termchartist has become less popular.
Characteristics
Technical analysis employs models and trading rules based on price andvolume transformations, such as the relative strength index, movingaverages, inter-market and intra-market price correlations, cycles or,classically, through recognition of chart patterns.
Technical analysis stands in contrast to the fundamental analysisapproach to security and stock analysis.
Technical analysis "ignores" the actual nature of the company, market,currency or commodity and is based solely on "the charts," that is to say
price and volume information, whereas fundamental analysis does look atthe actual facts of the company, market, currency or commodity.
For example, any large brokerage, trading group, or financial institution willtypically have both a technical analysis and fundamental analysis team.
Technical analysis is widely used among traders and financial professionals, andis very often used by active day traders, market makers, and pit traders. In the1960s and 1970s it was widely dismissed by academics. In a recent review, Irwinand Park reported that 56 of 95 modern studies found it produces positive results,but noted that many of the positive results were rendered dubious by issues such
as data snooping so that the evidence in support of technical analysis wasinconclusive; it is still considered by many academics to be pseudoscience.Academics such as Eugene Fama say the evidence for technical analysis issparse and is inconsistent with the weak form of the efficient market hypothesis.Users hold that even if technical analysis cannot predict the future, it helps toidentify trading opportunities.
Technical stock analysis is based on three basic principles namely:
1. Market action discounts everything.2. Prices move in trends.3. History repeats itself.
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Market action discounts everything:Based on the premise that all relevant information is already reflected by prices,pure technical analysts believe it is redundant to do fundamental analysis theysay news and news events do not significantly influence price, and citesupporting research such as the study by Cutler, Poterba, and summers titled"What Moves Stock Prices?"
On most of the sizable return days [large market moves]...the information that thepress cites as the cause of the market move is not particularly important. Pressreports on adjacent days also fail to reveal any convincing accounts of why future
profits or discount rates might have changed. Our inability to identify thefundamental shocks that accounted for these significant market moves is difficultto reconcile with the view that such shocks account for most of the variation instock returns.
Prices move in trends:
Technical analysts believe that prices trend directionally, i.e., up, down, orsideways (flat) or some combination. The basic definition of a price trend wasoriginally put forward by Dow Theory.
Each time the stock moved lower, it fell below its previous relative low price. Eachtime the stock moved higher, it could not reach the level of its previous relativehigh price.
History tends to repeat itself:
Technical analysts believe that investors collectively repeat the behavior of theinvestors that preceded them. "Everyone wants in on the next Microsoft," "If thisstock ever gets to $50 again, I will buy it," "This company's technology willrevolutionize its industry, therefore this stock will skyrocket" these are all
examples of investor sentiment repeating itself. To a technician, the emotions inthe market may be irrational, but they exist. Because investor behavior repeatsitself so often, technicians believe that recognizable (and predictable) pricepatterns will develop on a chart.
Technical analysis is not limited to charting, but it always considers price trends.For example, many technicians monitor surveys of investor sentiment. Thesesurveys gauge the attitude of market participants, specifically whether they arebearish or bullish. Technicians use these surveys to help determine whether atrend will continue or if a reversal could develop; they are most likely to anticipatea change when the surveys report extreme investor sentiment. Surveys that show
overwhelming bullishness, for example, are evidence that an uptrend mayreverse the premise being that if most investors are bullish they have already
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bought the market (anticipating higher prices). And because most investors arebullish and invested, one assumes that few buyers remain. This leaves morepotential sellers than buyers, despite the bullish sentiment. This suggests thatprices will trend down.
Can technical and Fundamental Co-Exist?
Although technical analysis and fundamental analysis are seen by many as polar
opposites - the oil and water of investing - many market participants have
experienced great success by combining the two. For example, some
fundamental analysts use technical analysis techniques to figure out the besttime to enter into an undervalued security. Oftentimes, this situation occurs when
the security is severely oversold. By timing entry into a security, the gains on the
investment can be greatly improved.
Alternatively, some technical traders might look at fundamentals to add strength
to a technical signal. For example, if a sell signal is given through technical
patterns and indicators, a technical trader might look to reaffirm his or her
decision by looking at some key fundamental data. Oftentimes, having both the
fundamentals and technical on your side can provide the best-case scenario for a
trade.
While mixing some of the components of technical and fundamental analysis is
not well received by the most devoted groups in each school, there are certainly
benefits to at least understanding both schools of thought.
Industry
The industry is globally represented by the International Federation of
Technical Analysts (IFTA), which is a Federation of regional and nationalorganizations and the Market Technicians Association (MTA). In the UnitedStates, the industry is represented by both the Market Technicians Association(MTA) and the American Association of Professional Technical Analysts(AAPTA). The United States is also represented by the Technical SecurityAnalysts Association of San Francisco (TSAASF). In the United Kingdom, theindustry is represented by the Society of Technical Analysts (STA). In Canadathe industry is represented by the Canadian Society of Technical Analysts.Additional major professional technical analysis organizations are noted in theExternal Links section below.
Professional technical analysis societies have worked on creating a body ofknowledge that describes the field of Technical Analysis. A body of knowledge is
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central to the field as a way of defining how and why technical analysis may work.It can then be used by academia, as well as regulatory bodies, in developingproper research and standards for the field. The Market Technicians Association(MTA) has published a body of knowledge, which is the structure for the MTA'sChartered Market Technician (CMT) exam.
Use
Traders generally share the view that trading in the direction of the trend is themost effective means to be profitable in financial or commodities markets. JohnW. Henry, Larry Hite, Ed Seykota, Richard Dennis, William Eckhardt, Victor
Sperandeo, Michael Marcus and Paul Tudor Jones (some of the so-called MarketWizards in the popular book of the same name by Jack D. Schwager) have eachamassed massive fortunes via the use of technical analysis and its concepts.George Lane, a technical analyst, coined one of the most popular phrases onWall Street, "The trend is your friend!".
Types of charts
OHLC "Bar Charts" - Open-High-Low-Close charts, also known as barcharts, plot the span between the high and low prices of a trading periodas a vertical line segment at the trading time, and the open and close
prices with horizontal tick marks on the range line, usually a tick to the leftfor the open price and a tick to the right for the closing price.
Candlestick chart - Of Japanese origin and similar to OHLC, candlestickswiden and fill the interval between the open and close prices to emphasizethe open/close relationship. In the West, often black or red candle bodiesrepresent a close lower than the open, while white, green or blue candlesrepresent a close higher than the open price.
Line chart - Connects the closing price values with line segments. Pointand figure chart - a chart type employing numerical filters with only passingreferences to time, and which ignores time entirely in its construction.
Resistance - a price level which acts as a ceiling above prices Support - a price level which acts as a floor below prices Breakout - the concept whereby prices forcefully penetrate an area
of prior support or resistance, usually, but not always, accompaniedby an increase in volume.
Trending - the phenomenon by which price movement tends topersist in one direction for an extended period of time
Momentum - the rate of price change
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Technical Indicators
Indicators are calculations based on the price and the volume of a security that
measure such things as money flow, trends, volatility and momentum. Indicators
are used as a secondary measure to the actual price movements and add
additional information to the analysis of securities. Indicators are used in two
main ways: to confirm price movement and the quality of chart patterns, and to
form buy and sell signals.
There are two main types of indicators: leading and lagging. A leading indicator
precedes price movements, giving them a predictive quality, while a lagging
indicator is a confirmation tool because it follows price movement. A leading
indicator is thought to be the strongest during periods of sideways or non-
trending trading ranges, while the lagging indicators are still useful during
trending periods.
The two main ways that indicators are used to form buy and sell signals in
technical analysis is through crossovers and divergence. Crossovers are the
most popular and are reflected when either the price moves through the moving
average, or when two different moving averages cross over each other. The
second way indicators are used is through divergence, which happens when the
direction of the price trend and the direction of the indicator trend are moving in
the opposite direction. This signals to indicator users that the direction of the
price trend is weakening.
Indicators that are used in technical analysis provide an extremely useful source
of additional information. These indicators help identify momentum, trends,
volatility and various other aspects in a security to aid in the technical analysis of
trends. It is important to note that while some traders use a single indicator solely
for buy and sell signals, they are best used in conjunction with price movement,
chart patterns and other indicators.
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Technical Analysis concepts
The Use of Trend:
One of the most important concepts in technical analysis is that of trend. The
meaning in finance isn't all that different from the general definition of the term - a
trend is really nothing more than the general direction in which a security or
market is headed.
Take a look at the chart below:
Figure 1
It isn't hard to see that the trend in Figure 1 is up. However, it's not always this
easy to see a trend:
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Unfortunately, trends are not always easy to see. In other words, defining a trend
goes well beyond the obvious. In any given chart, you will probably notice that
prices do not tend to move in a straight line in any direction, but rather in a series
of highs and lows.
In technical analysis, it is the movement of the highs and lows that constitutes a
trend. For example, an uptrend is classified as a series of higher highs and higher
lows, while a downtrend is one of lower lows and lower highs.
Figure 3
Figure 3 is an example of an uptrend. Point 2 in the chart is the first high, which isdetermined after the price falls from this point. Point 3 is the low that is
established as the price falls from the high. For this to remain an uptrend, each
successive low must not fall below the previous lowest point or the trend is
deemed a reversal.
Types of Trend
There are three types of trend:
Uptrends Downtrends Sideways/Horizontal Trends
As the names imply, when each successive peak and trough ishigher, it's referred to as an upward trend. If the peaks and troughsare getting lower, it's a downtrend. When there is little movement upor down in the peaks and troughs, it's a sideways or horizontal trend.If you want to get really technical, you might even say that a sidewaystrend is actually not a trend on its own, but a lack of a well-definedtrend in either direction. In any case, the market can really only trend
in these three ways: up, down or nowhere.
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Trend Lengths
Along with these three trend directions, there are three trend classifications.
A trend of any direction can be classified as a long-term trend, intermediate trendor a short-term trend. In terms of the stock market, a major trend is generallycategorized as one lasting longer than a year. An intermediate trend isconsidered to last between one and three months and a near-term trend isanything less than a month. A long-term trend is composed of severalintermediate trends, which often move against the direction of the major trend. Ifthe major trend is upward and there is a downward correction in price movementfollowed by a continuation of the uptrend, the correction is considered to be an
intermediate trend. The short-term trends are components of both major andintermediate trends. Take a look a Figure 4 to get a sense of how these threetrend lengths might look.
Figure 4
When analyzing trends, it is important that the chart is constructed to best
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reflect the type of trend being analyzed. To help identify long-term trends,weekly charts or daily charts spanning a five-year period are used bychartists to get a better idea of the long-term trend. Daily data charts arebest used when analyzing both intermediate and short-term trends. It is alsoimportant to remember that the longer the trend, the more important it is; for
example, a one-month trend is not as significant as a five-year trend.
A trend line is a simple charting technique that adds a line to a chart torepresent the trend in the market or a stock. Drawing a trend line is assimple as drawing a straight line that follows a general trend. These linesare used to clearly show the trend and are also used in the identification oftrend reversals.
As you can see in Figure 5, an upward trend line is drawn at the lows of anupward trend. This line represents the support the stock has every timeit moves from a high to a low. Notice how the price is propped up by thissupport. This type of trend line helps traders to anticipate the point at whicha stock's price will begin moving upwards again. Similarly, a downward trendline is drawn at the highs of the downward trend. This line represents theresistance level that a stock faces every time the price moves from a low toa high.
Figure 5
Channels
A channel, or channel lines, is the addition of two parallel trend lines that act asstrong areas of support and resistance. The upper trend line connects a series of
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highs, while the lower trend line connects a series of lows. A channel can slopeupward, downward or sideways but, regardless of the direction, the interpretationremains the same. Traders will expect a given security to trade between the twolevels of support and resistance until it breaks beyond one of the levels, in whichcase traders can expect a sharp move in the direction of the break. Along with
clearly displaying the trend, channels are mainly used to illustrate important areasof support and resistance.
Figure 6
Figure 6 illustrates a descending channel on a stock chart; the upper trend linehas been placed on the highs and the lower trend line is on the lows. The pricehas bounced off of these lines several times, and has remained range-bound forseveral months.
As long as the price does not fall below the lower line or move beyond the upperresistance, the range-bound downtrend is expected to continue.
Conclusion
It is important to be able to understand and identify trends so that you can tradewith rather than against them. Two important sayings in technical analysis are"the trend is your friend" and "don't buck the trend," illustrating how importanttrend analysis is for technical traders.
Support and Resistance
Once you understand the concept of a trend, the next major concept is that of
support and resistance. You'll often hear technical analysts talk about theongoing battle between the bulls and the bears, or the struggle between buyers
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(demand) and sellers (supply). This is revealed by the prices a security seldom
moves above (resistance) or below (support).
Figure 1
As you can see in Figure 1, support is the price level through which a stock or
market seldom falls (illustrated by the blue arrows). Resistance, on the other
hand, is the price level that a stock or market seldom surpasses (illustrated by the
red arrows).
Why does it happen?
These support and resistance levels are seen as important in terms of market
psychology and supply and demand. Support and resistance levels are the levels
at which a lot of traders are willing to buy the stock (in the case of a support) or
sell it (in the case of resistance). When these trend lines are broken, the supply
and demand and the psychology behind the stock's movements is thought to
have shifted, in which case new levels of support and resistance will likely be
established.
Buyers will often purchase large amounts of stock once the price starts to fall
toward a major round number such as $50, which makes it more difficult for
shares to fall below the level. On the other hand, sellers start to sell off a stock as
it moves toward a round number peak, making it difficult to move past this upper
level as well.
It is the increased buying and selling pressure at these levels that makes them
important points of support and resistance and, in many cases, major
psychological points as well.
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Role Reversal
Once a resistance or support level is broken, its role is reversed. If the price falls
below a support level, that level will become resistance. If the price rises above a
resistance level, it will often become support. As the price moves past a level of
support or resistance, it is thought that supply and demand has shifted, causing
the breached level to reverse its role. For a true reversal to occur, however, it isimportant that the price make a strong move through either the support or
resistance.
Figure 2
For example, as you can see in Figure 2, the dotted line is shown as a level of
resistance that has prevented the price from heading higher on two previous
occasions (Points 1 and 2). However, once the resistance is broken, it becomes a
level of support (shown by Points 3 and 4) by propping up the price and
preventing it from heading lower again.
Many traders who begin using technical analysis find this concept hard to believe
and don't realize that this phenomenon occurs rather frequently, even with some
of the most well-known companies. For example, as you can see in Figure 3, this
phenomenon is evident on the Wal-Mart Stores Inc. (WMT) chart between 2003
and 2006. Notice how the role of the $51 level changes from a strong level of
support to a level of resistance.
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The Importance of Volume
To this point, we've only discussed the price of a security. While price is theprimary item of concern in technical analysis, volume is also extremely important.
What is Volume?
Volume is simply the number of shares or contracts that trade over a given period
of time, usually a day. The higher the volume, the more active the security. To
determine the movement of the volume (up or down), chartists look at the volume
bars that can usually be found at the bottom of any chart. Volume bars illustrate
how many shares have traded per period and show trends in the same way that
prices do.
Why Volume is Important
Volume is an important aspect of technical analysis because it is used to confirm
trends and chart patterns. Any price movement up or down with relatively high
volume is seen as a stronger, more relevant move than a similar move with weakvolume. Therefore, if you are looking at a large price movement, you should also
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examine the volume to see whether it tells the same story.
Say, for example, that a stock jumps 5% in one trading day after being in a long
downtrend. Is this a sign of a trend reversal? This is where volume helps traders.
If volume is high during the day relative to the average daily volume, it is a sign
that the reversal is probably for real. On the other hand, if the volume is below
average, there may not be enough conviction to support a true trend reversal.
Volume should move with the trend. If prices are moving in an upward trend,
volume should increase (and vice versa). If the previous relationship between
volume and price movements starts to deteriorate, it is usually a sign of
weakness in the trend. For example, if the stock is in an uptrend but the up
trading days are marked with lower volume, it is a sign that the trend is starting to
lose its legs and may soon end.
Volume precedes price
Another important idea in technical analysis is that price is preceded by volume.
Volume is closely monitored by technicians and chartists to form ideas on
upcoming trend reversals.
If volume is starting to decrease in an uptrend, it is usually a sign that the upward
run is about to end.
Now that we have a better understanding of some of the important factors of
technical analysis, we can move on to charts, which help to identify tradingopportunities in prices movements.
Figure 3
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In almost every case, a stock will have both a level of support and a level of
resistance and will trade in this range as it bounces between these levels. This is
most often seen when a stock is trading in a generally sideways manner as the
price moves through successive peaks and troughs, testing resistance andsupport.
The importance of support and Resistance
Support and resistance analysis is an important part of trends because it can be
used to make trading decisions and identify when a trend is reversing. For
example, if a trader identifies an important level of resistance that has been
tested several times but never broken, he or she may decide to take profits as the
security moves toward this point because it is unlikely that it will move past thislevel.
Support and resistance levels both test and confirm trends and need to be
monitored by anyone who uses technical analysis. As long as the price of the
share remains between these levels of support and resistance, the trend is likely
to continue. It is important to note, however, that a break beyond a level of
support or resistance does not always have to be a reversal. For example, if a
price moved above the resistance levels of an upward trending channel, the trend
has accelerated, not reversed. This means that the price appreciation is expectedto be faster than it was in the channel.
Being aware of these important support and resistance points should affect the
way that you trade a stock. Traders should avoid placing orders at these major
points, as the area around them is usually marked by a lot of volatility. If you feel
confident about making a trade near a support or resistance level, it is important
that you follow this simple rule: do not place orders directly at the support or
resistance level. This is because in many cases, the price never actually reaches
the whole number, but flirts with it instead. So if you're bullish on a stock that is
moving toward an important support level, do not place the trade at the support
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level. Instead, place it above the support level, but within a few points. On the
other hand, if you are placing stops or short selling, set up your trade price at or
below the level of support.
Technical Tools
2.1 Moving Averages (MA)
It is a simple trend analysis technique which averages out the prices for a
particular period of time. In short it is a Curving Trend line which helps in
identifying the beginning of a new trend line or end of a old trend line. It is
only an indicator tool and not a leading tool. It only reacts and never
anticipates. Moving averages lag the market price action and smoothens the
noise in price action. Shorter term Moving Averages are more sensitive to price
action in comparison to longer duration moving averages. Moving averages can
be Simple or Weighted or Exponential Moving averages.
When the Closing Prices move above the Moving Average, a Buy signal is
generated and if it moves below the moving average, a Sell signal is
generated. A Shorter period Moving average gives an early signal in comparison
to longer period average, it also generates lots of noise and whipsaws. The
longer average works better when the trend remains in motion and shorter
averages work better when the trend is reversing.
Most chart patterns show a lot of variation in price movement. This can
make it difficult for traders to get an idea of a security's overall trend. One simplemethod traders use to combat this is to apply moving averages. A moving
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average is the average price of a security over a set amount of time. By plotting a
security's average price, the price movement is smoothed out. Once the day-to-
day fluctuations are removed, traders are better able to identify the true trend and
increase the probability that it will work
in their favor.
Types of Moving Averages
There are a number of different types of moving averages that vary in the way
they are calculated, but how each average is interpreted remains the same. The
calculations only differ in regards to the weighting that they place on the price
data, shifting from equal weighting of each price point to more weight being
placed on recent data. The three most common types of moving averages are
simple, linear and exponential.
Simple Moving Average (SMA)
This is the most common method used to calculate the moving average of prices.
It simply takes the sum of all of the past closing prices over the time period and
divides the result by the number of prices used in the calculation. For example, in
a 10-day moving average, the last 10 closing prices are added together and then
divided by 10. As you can see in Figure 1, a trader is able to make the average
less responsive to changing prices by increasing the number of periods used inthe calculation.
Increasing the number of time periods in the calculation is one of the best ways to
gauge the strength of the long-term trend and the likelihood that it will reverse.
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Figure 1
Many individuals argue that the usefulness of this type of average is limitedbecause each point in the data series has the same impact on the result
regardless of where it occurs in the sequence. The critics argue that the most
recent data is more important and, therefore, it should also have a higher
weighting. This type of criticism has been one of the main factors leading to the
invention of other forms of moving averages.
Linear Weighted AverageThis moving average indicator is the least common out of the three and is used to
address the problem of the equal weighting. The linear weighted moving average
is calculated by taking the sum of all the closing prices over a certain time period
and multiplying them by the position of the data point and then dividing by the
sum of the number of periods.
For example, in a five-day linear weighted average, today's closing price is
multiplied by five, yesterday's by four and so on until the first day in the period
range is reached. These numbers are then added together and divided by thesum of the multipliers.
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Exponential Moving Average (EMA)
This moving average calculation uses a smoothing factor to place a higher weight
on recent data points and is regarded as much more efficient than the linear
weighted average. Having an understanding of the calculation is not generally
required for most traders because most charting packages do the calculation for
you. The most important thing to remember about the exponential moving
average is that it is more responsive to new information relative to the simple
moving average. This responsiveness is one of the key factors of why this is the
moving average of choice among many technical traders.
As you can see in Figure 2, a 15-period EMA rises and falls faster than a 15-period SMA. This slight difference doesnt seem like much, but it is an important
factor to be aware of since it can affect returns.
Figure 2
Major Uses of Moving Averages
Moving averages are used to identify current trends and trend reversals as
well as to set up support and resistance levels.
Moving averages can be used to quickly identify whether a security is moving in
an uptrend or a downtrend depending on the direction of the moving average. Asyou can see in Figure 3, when a moving average is heading upward and the
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Figure 4
The other signal of a trend reversal is when one moving average crosses through
another. For example, as you can see in Figure 5, if the 15-day moving average
crosses above the 50-day moving average, it is a positive sign that the price will
start to increase.
Figure 5
If the periods used in the calculation are relatively short, for example 15 and 35,
this could signal a short-term trend reversal. On the other hand, when two
averages with relatively long time frames cross over (50 and 200, for
example),this is used to suggest a long-term shift in trend.
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Another major way moving averages are used is to identify support and
resistance levels. It is not uncommon to see a stock that has been falling stop its
decline and reverse direction once it hits the support of a major moving average.
A move through a major moving average is often used as a signal by technical
traders that the trend is reversing. For example, if the price breaks through the200-day moving average in a downward direction, it is a signal that the uptrend is
reversing.
Figure 6
Moving averages are a powerful tool for analyzing the trend in a security. They
provide useful support and resistance points and are very easy to use. The most
common time frames that are used when creating moving averages are the 200-
day, 100-day, 50-day, 20-day and 10-day. The 200-day average is thought to bea good measure of a trading year, a 100-day average of a half a year, a 50-day
average of a quarter of a year, a 20-day average of a month and 10-day average
of two weeks.
Moving averages help technical traders smooth out some of the noise that is
found in day-to-day price movements, giving traders a clearer view of the price
trend. So far we have been focused on price movement, through charts and
averages. In the next section, we'll look at some other techniques used to confirm
price movement and patterns
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CrossoverThe point on a stock chart when a security and an indicator intersect. Crossovers are used by tech
analysis to aid in forecasting the future movements in the price of a stock. In most technical analys
models, a crossover is a signal to either buy or sell.
Below we have a stock that falls below its 20-day moving average - a bearish sign.
An example of a cros0sover would be when the security line breaks through its 25-day moving average whi
a signal to buy the stock. Some of the indicators that use crossovers are "moving average" and "Bollinger b
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2.2Relative Strength Index
The relative strength index (RSI) is another one of the most used and well-known momentum indicators in technical analysis. RSI helps to signal
overbought and oversold conditions in a security. It is the most popular and
trusted Oscillator tool used by most of the traders, which smoothens the noise
found in most of the other Oscillator tools.
RSI = 100 100 / (1+RS)
RS = Average of x days UP close
Average of x days DOWN close
If prices are rising or flat and RSI is decreasing, look for turn down in prices. Ifprices are declining or flat and RSI is increasing, expect prices to move higher.
14days is popularly used for the calculation of RSI and 14weeks in case of aWeekly chart being used. However variations of 14 days are also used. Shorterthe time period, more sensitive the oscillator becomes and wider The indicator isplotted in a range between zero and 100. A reading above 70 is used to suggestthat a security is overbought, while a reading below 30 is used to suggest that itis oversold. This indicator helps traders to identify whether a securitys price has
been unreasonably pushed to current levels and whether a reversal may be onthe way.
The standard calculation for RSI uses 14 trading days as the basis, which can beadjusted to meet the needs of the user. If the trading period is adjusted to use
fewer days, the RSI will be more volatile and will be used for shorter term trades
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Interpretation
RSI is plotted on a vertical scale of 0 to 100. The 70% and 30% levels are usedas warning signals. An RSI above 70% is considered overbought and below 30%is considered oversold. The 80% and 20% levels are preferred by some traders.The significance depends upon the time frame being considered. An overboughtreading in a 9-day RSI is not nearly as significant as an RSI for a 12-monthperiod. An overbought or oversold condition merely indicates that there is a highprobability of a counter reaction. It is an indication that there may be anopportunity to buy or sell, but does notprovide the final signal. RSI signals shouldalways be used in conjunction with trend-reversal signals offered by the price
itself. RSI can be plotted for any time span. Wilder originally recommended usinga 14-day RSI. Since then, the 9, 10 and 25-day RSIs have also become popular.The shorter the time period, the more sensitive the oscillator becomes. If the useris trading short-term moves, the time period can be shortened. Lengthening thetime period makes the oscillator smoother and narrower in amplitude. In usingRSI, a crossover above the 70% level is a warning signal to prepare to sell and,conversely, when the RSI falls below 30% you have a notice to prepare to buy.The actual buy and sell signals are given when the RSI reverses (see below).RSI crossings through the 50% level are also used as buy and sell signals bysome traders.
Signals
Tops & Bottoms, Failure Swings, Divergence
Traders watch for double tops or what Wilder referred to as "failure swings." If theRSI makes a double top formation, with the first top above 70% and the secondtop below the first, you get a sell signal when the RSI falls below the level of thedip. Conversely, a double bottom at or below 30% (with the first low below 30%and the second at or above the same level) gives you a buy signal when the RSIbreaks above thePrevious peak.
These failure swings can lead to divergences between the price action and theRSI. For example, a divergence occurs when a market makes a new high or low,but the RSI fails to set a matching new high or low. A divergence can be anindication of an impending reversal. In Wilder's opinion, divergences are themost important signal provided by RSI.
Trend lines
RSI trend lines can provide good signals, particularly when used in conjunctionwith price patterns. When both price and RSI trend lines are violated within ashort period you could have an important buy or sell signal.
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RSI is used in various forms including Touch , Peak , Retracement and 50Crossover methods. The touch method generates a buy signal when the RSItouches the lower bound (typically set at 30) which indicates that the market isoversold and hence a time to buy. It generates a sell signal when the RSI
touches the upper bound (typically set at 70) which indicates that the market isoverbought and hence a time to sell.
The peak method generates a buy signal when the RSI has crossed the lowerbound (typically set at 30) and turned back. It generates a sell signal when theRSI has crossed the upper bound (typically set at 70) and turned back. Theretracement method generates a buy signal when theRSI has crossed the lower bound (typically set at 30) and retraced back to thesame lower bound or higher. It generates a sell signal when the RSI has crossedthe upper bound (typically set at 70) and retraced back to the same upper boundor lower. The 50 crossover method generates a buy signal when the RSI rises
above 50 and a sell signal when the RSI falls below 50.
2.3 Moving Average Convergence Divergence
MACD is a momentum indicator developed by Gerald Apple.The moving average
convergence divergence (MACD) is one of the most well known and used
indicators in technical analysis. This indicator is comprised of two exponential
moving averages, which help to measure momentum in the security. The MACD
is simply the difference between these two moving averages plotted against a
centerline. The centerline is the point at which the two moving averages are
equal. Along with the MACD and the centerline, an exponential moving average
of the MACD itself is plotted on the chart. The idea behind this momentum
indicator is to measure short-term momentum compared to longer term
momentum to help signal the current direction of momentum.
MACD= shorter term moving average - longer
term moving average
When the MACD is positive, it signals that the shorter term moving average is
above the longer term moving average and suggests upward momentum. The
opposite holds true when the MACD is negative - this signals that the shorter
term is below the longer and suggest downward momentum. When the MACD
line crosses over the centerline, it signals a crossing in the moving averages. The
most common moving average values used in the calculation are the 26-day and
12-day exponential moving averages. The signal line is commonly created byusing a nine-day exponential moving average of the MACD values. These values
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can be adjusted to meet the needs of the technician and the security. For more
volatile securities, shorter term averages are used while less volatile securities
should have longer averages.
Another aspect to the MACD indicator that is often found on charts is the MACDhistogram. The histogram is plotted on the centerline and represented by bars.
Each bar is the difference between the MACD and the signal line or, in most
cases, the nine-day exponential moving average. The higher the bars are in
either direction, the more momentum behind the direction in which the bars point.
As you can see in Figure 2, one of the most common buy signals is generated
when the MACD crosses above the signal line (blue dotted line), while sell
signals often occur when the MACD crosses below the signal.
Figure 2
The Moving Average Convergence Divergence (MACD) statistic is a simple
difference between two moving averages -a short windowed one and a longer
windowed one. The traditional values are 12-day and 26-day.
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Signals are generated in multiple ways. Since the MACD is an oscillator, simpleup crossings across the zero line are considered bullish; correspondingly, downcrossings are considered bearish. In addition, the MACD statistic is often plottedagainst its own 9 day exponential moving average. Up crossings of the MACDagainst its moving average are considered bullish; down crossings are bearish.
It consists of the indicator curve, the zero line, and a trigger line. The indicatorcurve depicts the vertical distance between two exponential moving averagecurves covering time periods of differing widths (traditionally 12 and 26 periods).The trigger line is an exponentially smoothed curve of the indicator curve(traditionally over 9 periods).The zero line indicates where the short-term and long-term moving averagecurves would intersect if plotted separately. As prices move further away from thetrend indicated by the longer-term moving average, the MACD indicator linebecomes more positive or negative, depending upon the direction of pricemovement. As prices move closer to the trend, the MACD indicator approacheszero. By first smoothing the price volatility with the short-term moving average,then smoothing the indicator with the trigger line, it is believed the MACDprovides very reliable trend reversal and confirmation signals.
An exponential moving average of MACD for t periods you specify is plotted ontop of the MACD as a trigger line.Interpretation: Buy (sell) when MACD crosses above (below) the trigger line orzero line. Look for divergence between price data and MACD curve. The MACDproves most effective in trending markets rather than choppy, sideways markets.There are two main sets of signals generated by the MACD: crossovers and
divergences.
There are two main MACD crossover signal.
Signal Line Crossovers: MACD crosses above or below the signal line.
Zero Line Crossovers: MACD crosses above or below the zero line
Thomas Aspray found that MACD signals often lagged important market moves,especially when applied to weekly charts. He first experimented with changingthe moving averages and found that shorter moving averages did indeed speed
up the signals. However, he was looking for a means to anticipate MACDcrossovers and came up with the MACD Histogram
The MACD Histogram represents the difference between MACD and it's signalline (usually the 9-day Exponential Moving Average (EMA) of the MACD).Whenever MACD crosses the signal line, MACD-H crosses the zero line.
If the MACD line is above the signal line, the histogram is positive, and thebars are drawn above the zero line.\
If the MACD line is below the signal line, histogram is negative, and thebars are drawn below the zero line.
Sharp increases in the MACD-H indicate that MACD is rising faster than its 9-dayEMA and upward momentum is strengthening. Sharp declines in the MACD-H
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indicate that MACD is falling faster than its moving average and downwardmomentum is increasing.
Divergences between MACD and MACD-H are the main tool used to anticipatecrossovers. A positive divergence in the MACD-H indicates that MACD is
strengthening and could be on the verge of a bullish moving average crossover.A negative divergence in the MACD-H indicates that MACD is weakening andcan act to foreshadow a bearishmoving average crossover in MACD.
Signals
The main signal generated by the MACD-Histogram is a divergencefrom MACDfollowed by a zero-line crossover.
A bullish signal is generated when a positivedivergence forms and thereis an upwardzero line cross over.
A bearish signalis generated when there is a negativedivergence and a
downwardzero line cross over.In Technical Analysis of the Financial Markets, John Murphy states that the realvalue of the MACD-H is spotting when the spread between the two lines iswidening or narrowing. When the histogram is above its zero line (positive) butstarts to fall, the uptrend is weakening.
Conversely, when the histogram is below its zero line (negative) and starts torise, the downtrend is losing momentum. These turns of the histogram provideearly warnings that the current trend is losing momentum, and the buy or sellsignal is given when the histogram crosses the zero line.
Murphy also advocates a two-tiered approach in order to avoid making tradesagainst the major trend. The weekly MACD-H can be used to generate long-termsignals. Then only short-term signals that agree with the major trend are used.
If the long-term trend is up, only positivedivergences with upward zero linecrossovers are considered valid for the MACD-H.
If the long-term trend is down, only negativedivergences with downwardzero line crossovers are considered valid.
Used this way, the weekly signals become trend filters for daily signals. Thisprevents using daily signals to trade against the overall trend.
SIGNAL LINE CROSSOVER
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The basic MACD trading rule is to buy when the MACD rises above its signal line.Similarly, a sell signal occurs when the MACD crosses below its signal line. Thecrossing of the MACD line above the signal line can denote the beginning of atrend.An uptrend typically pauses or stops when the MACD line crosses and fallsbelow the signal line. The location relative to the zero line is also important in
indicating how strong a trend might be. A crossover above the zero line isconsidered more bullish than one below the zero line. The higher above the zeroline it crosses, the stronger the uptrend. If the crossover occurs below the zeroline, the uptrend is likely not very strong. When the bullish crossover occursabove the zero line, the uptrend gains more momentum, and the price rises withmore intensity.
Bullish MACD crossovers are probably the most common signals and as suchcan be less reliable. If not used in conjunction with other technical analysis tools,these crossovers can lead to whipsaws and many false signals. One way to tryand counteract false signals is to apply a price filter to the crossover to see if atrend will hold. An example of a price filter would be to buy if the MACD breaksabove the signal line and remains above for three days. The buy signal wouldthen commence at the end of the third day.
2.1Purpose and Objectives of the Study
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To study the technical analysis forecast applied on stock market bymeans of a specific indicator.
To provide new evidence by using few NSE listed companiesdata to investigate whether the Technical indicators do play anyuseful role in the timing of stock market entry and exit.
To study the few technical tools by selecting few companiesstocks and apply the tools on them.
2.2 STATEMENT OF PROBLEMS
It is a Probabilistic study and not deterministic study.
Does not work accurately for illiquid markets and underlying assets with
controlled regime.
Past may not be the indicator of future.
2.3 SOURCES OF DATA AND DATA COLLECTION
The Primary as well as Secondary data is proposed to be collected.
a) Primary Data: Primary data is the data which is collected by the researcher
directly from his own observations and experiences. For example, if the
researcher conducts a survey for the collection of data, then it is known as
Primary data.
b) Secondary Data: For collection of secondary data the internet, reference book,
research reports, related articles etc .proposed to be used.
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Unitech
Company Data:
Company Name: Unitech
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Industry : Real Estate
Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20-days moving
Averages shown as follow:
Interpretation: Overall trend was bearish and chart suggested that one cantake care of their position.
RSI Tools on Unitech
Rule 2: Using the RSI method the following trading activity is shown asFollows:
Action Share price Profit Loss
Sell Rs.112 N/A N/A
Buy Rs.79 - 33
Sell Rs.84 5 -
Buy Rs.68 - 16
Sell Rs.78 10 -
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Interpretation: RSI tool suggested that slight bearish trend and one canwait theirTurn and time to make a profit. And also take fresh position every dip.
MACD on Unitech
Rule 3: Using the MACD method the following trading activity is shown as
Action Share price Profit Loss
Sell Rs.112 N/A N/A
Buy Rs.98 - 14
Sell Rs.109 11 -
Buy Rs.72 - 37
Sell Rs.83 11 -
Buy Rs.66 - 17
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Follows:
Interpretation: MACD chart suggesting overall trend is on bearish side.Andalso equating volatility as well. So investors can take care of their positions.
EMA Tool on BHEL
Company Data:
Company Name: BHEL
Action Share price Profit Loss
Sell Rs.112 N/A N/A
Buy Rs.98 - 14
Sell Rs.109 11 -
Buy Rs.72 - 37
Sell Rs.83 11 -
Buy Rs.66 - 17
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Industry : Power
Exchange : NSE
Interpretation: Overall trend of BHEL was quite uptrend and at last it wentsideway and difficult to find out the trend. BHEL was well to make a decent profit.
RSI Tool On BHEL
Action Share price Profit Loss
Buy Rs.2252 N/A N/A
Sell Rs.2548 290 -
Buy Rs.2103 - 445
Sell Rs.2258 155 -
Buy Rs.2231 - 27
Sell Rs.2408 177 -
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Interpretation: RSI indicates the first few days of BHEL was uptrend and afterthat it started declining and finally went on side way. And tool says that one cantake a fresh position at 30 level.
Action Share price Profit Loss
Buy Rs.2252 N/A N/A
Sell Rs.2548 290 -
Buy Rs.2103 - 445
Sell Rs.2258 155 -
Buy Rs.2231 - 27
Sell Rs.2408 177 -
Action Share price Profit Loss
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Interpretation: Once the faster line crosses the slower line at bottom level thanthat is the best signal for buying. But here in this graph both faster line and slowerlines are moving or overlaps each other. So difficult to find out the trend and aswell as price movements.
EMA on ACC
Company Data:
Company Name: ACC
Buy Rs.2252 N/A N/A
Sell Rs.2548 290 -
Buy Rs.2103 - 445
Sell Rs.2258 155 -
Buy Rs.2231 - 27
Sell Rs.2408 177 -
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Industry : Cement
Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20-14-5 days movingAverages shown as follow:
Interpretation: The EMA says that trend is on bullish side with healthy uptrend.One can make a decent profit and exit the position.
ACC on MACD
Action Share price Profit Loss
Sell Rs.830 N/A N/A
Buy Rs.710 - 120
Sell Rs.960 250 -
Buy Rs.803 - 157
Sell Rs.1018 215
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Rule 2: Using the MACD method the following trading activity is shown asFollows:
Interpretation: This MACD graph says that ACC stock is quite healthy andhaving volatility with long term uptrend. When it crosses the zero line the pricefluctuations is also good. Overall the trend is healthy to make a profit.
RSI on ACC
Action Share price Profit Loss
Sell Rs.830 N/A N/A
Buy Rs.710 - 120
Sell Rs.960 250 -
Buy Rs.803 - 157
Sell Rs.1018 215
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Rule 3: Using the RSI method the following trading activity is shown asFollows:
Interpretation: RSI says that the first few months the stock was performing onsideway and stock went up with short term uptrend and again sideway so theoverall Graph having both ups and downs.
Cipla on EMA
Action Share price Profit Loss
Sell Rs.830 N/A N/A
Buy Rs.710 - 120
Sell Rs.960 250 -
Buy Rs.803 - 157
Sell Rs.1018 215
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Company Data:
Company Name: CiplaIndustry : Pharmaceuticals
Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20-10-5 days movingAverages shown as follow:
Interpretation: The 20-10-5 days moving average says that overall trend is onbullish side and also price movement pretty good at upward movement, and alsosuggested that one can go long with making decent profit in between.
Cipla on RSI
Action Share price Profit Loss
Buy Rs.255 N/A N/A
Sell Rs.292 37
Buy Rs.274 - 18
Sell Rs.360 86 -
Buy Rs.302 - 58
Sell Rs.353 51 -
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Rule 2: Using the RSI method the following trading activity is shown asFollows
Interpretation: RSI signals at bottom level i.e., 30 level (buying zone) and alsoclearly observes that how RSI acts Price acts in a same way. So one can take afreshNew position
MACD Cipla
Action Share price Profit Loss
Buy Rs.255 N/A N/A
Sell Rs.292 37
Buy Rs.274 - 18
Sell Rs.360 86 -
Buy Rs.302 - 58
Sell Rs.353 51 -
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Rule 2: Using the MACD method the following trading activity is shown asFollows
Interpretation: Both faster and slower lines are moving togetherly and it saysthatInvestor can unable to identified the trend and price movements as well.
Airtel on EMA
Action Share price Profit Loss
Buy Rs.255 N/A N/A
Sell Rs.292 37
Buy Rs.274 - 18
Sell Rs.360 86 -
Buy Rs.302 - 58
Sell Rs.353 51 -
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Company Name: Bharti AirtelIndustry : Telecommunication
Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20-10-5 days movingAverages shown as follow
Interpretation: EMA suggests that there is a big downtrend happened and stockwent up sideway so that one can wait before going for fresh position.
Action Share price Profit Loss
Sell Rs.487 N/A N/A
Buy Rs.270 - 217
Sell Rs.338 88 -
Buy Rs.320 - 18
Sell Rs.331 11 -
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Airtel on RSI
Rule 2: Using the RSI method the following trading activity is shown asFollows
Interpretation: RSI signals that overall sideway trend is there. And alsoconsolidation taking place and one can unable to identify the trend and behaviorof the stock as well.so wait for clear signals.
Action Share price Profit Loss
Sell Rs.487 N/A N/A
Buy Rs.270 - 217
Sell Rs.338 88 -
Buy Rs.320 - 18
Sell Rs.331 11 -
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Airtel on MACD
Rule 2: Using the MACD method the following trading activity is shown asFollows
Interpretation: Big downfall has happened in the beginning and later faster andslower lines are converged and no price upward and downward movements.sooneWait for their fresh position before going long.
Action Share price Profit Loss
Sell Rs.487 N/A N/A
Buy Rs.270 - 217
Sell Rs.338 88 -
Buy Rs.320 - 18
Sell Rs.331 11 -
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EMA Tata Motors
Company Name : Tata motorsIndustry : Automobile
Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20-10-5 days movingAverages shown as follow
Interpretation : 20 days EMA says that there is an big uptrend with long termnature and one can go long by doing decent profit in between as well.
Action Share price Profit Loss
Buy Rs.570 N/A N/A
Sell Rs.715 145 -
Buy Rs.690 - 25
Sell Rs.840 140 -
Buy Rs.700 - 140
Sell Rs 840 140 -
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RSI Tata Motors
Rule 2: Using the RSI method the following trading activity is shown asFollows
Interpretation: RSI is moving sideway but chart is on uptrend this is a weakstock because both RI and Chart are moving against in direction and one cantake care of their position.
Action Share price Profit Loss
Buy Rs.570 N/A N/A
Sell Rs.715 145 -
Buy Rs.690 - 25
Sell Rs.840 140 -
Buy Rs.700 - 140
Sell Rs 840 140 -
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TATA MOTORS ON MACD
Rule 2: Using the MACD method the following trading activity is shown asFollows
Interpretation: An overbought situation exists when the lines are too far abovethe zero line and over sold situation when the lines are too far below the zeroline. But in this case two things are not happening but chart is quite uptrend soone can take care of their position.
Action Share price Profit Loss
Buy Rs.570 N/A N/A
Sell Rs.715 145 -
Buy Rs.690 - 25
Sell Rs.840 140 -
Buy Rs.700 - 140
Sell Rs 840 140 -
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TCS on EMA
Company Name : Tata consultancy serviceIndustry : Software
Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20 days movingAverages shown as follow
Interpretation: The overall trend is quite upward movement and also chartsuggests one can go long by making decent profit.
Action Share price Profit Loss
Buy Rs.628 N/A N/A
Sell Rs.736 108 -
Buy Rs.694 - 58
Sell Rs.810 116 -
Buy Rs.700 - 140
Sell Rs 840 140 -
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TCS on MACD
Rule 2: Using the MACD method the following trading activity is shown asFollows
Interpretation: Both faster and slower lines are above the zero line and itindicates that is an overbought situation and also one can take care of theirpositin before moving long
Action Share price Profit Loss
Buy Rs.570 N/A N/A
Sell Rs.715 145 -
Buy Rs.690 - 25
Sell Rs.840 140 -
Buy Rs.700 - 140
Sell Rs 840 140 -
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TCS on RSI
Rule 2: Using the RSI method the following trading activity is shown asFollows
Interpretation: RSI moves sideway but chart is moving against the RSI tool. so it
is a weak stock because both are moving against direction. And tool says alwaysfollow the RSI not a Price.
Action Share price Profit Loss
Buy Rs.570 N/A N/A
Sell Rs.715 145 -
Buy Rs.690 - 25
Sell Rs.840 140 -
Buy Rs.700 - 140
Sell Rs 840 140 -
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Summary
In this study, I have made 21 predictions in six months. All tools are tested for theNSE stocks 2009-2010. The price movement plotted on the graph for calculated datamade the predictions. Relevance of the share price are tested by comparing theactual price and signals of the graphs. Totally 15 predictions of the graphs were ableto make right decision and helped to investors to profitable trade. 6 predictions of thegraphs were false. They did not fetch the profit to the traders. Therefore, we can say
technical analysis is worked here to the extent of 71%.
WHICH IS BETTER?
The result of this study shows that day moving average is the best tool to pick up thestock. The day moving average prediction in the year 2009-2010 is more efficientcompare to other tools. 9 out of 12 time the day moving average has given rightprediction. The traders who invested in the share according to the day movingaverage trend were able to make maximum profit.
The Momentum also proven to be satisfactory to the traders in case of NSE Stocks
2009-2010. It has given 7 times right prediction out of 12. Other tools which I have
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used in this study are Relative strength index and MACD methods. Both were givenonly 5 times right prediction.
The investors who made their investment according to these predictions haveoccurred a loss. It may not be 100% true, because the tools and the software used in
the chart here are not very advanced one as traders use in their analysis. However,the day moving average is the one tool which is very simple to construct the graphand more reliable to the regular traders.
Which technical analysis tool we use will depend on your trading and investing styleand preferences. The day moving average obviously has a lag, but the other toolswhich are used here also be prone to quicker breaks. Some traders prefer to useRelative Strength Index for shorter time periods to capture changes quicker. Someinvestors prefer simple moving averages over long time periods to identify long-termtrend changes. In addition, much will depend on the individual security in question.The technical chart type and length of time will depend greatly on the individualsecurity and how it has reacted in the past.
The initial thought for some is that greater sensitivity and quicker signals are boundto be beneficial. This is not always true and brings up a great dilemma for thetechnical analyst: the trade off between sensitivity and reliability. The more sensitivean indicator is, the more signals that will be given. These signals may prove timely,but with increased sensitivity comes an increase in false signals. The less sensitivean indicator is, the fewer signals that will be given. However, less sensitivity leads tofewer and more reliable signals. Sometimes these signals can be late as well.
findings:
Technical analysis does not work accurately for illiquid markets.
Technical analysis is a probalistic study and it is not a deterministic study.So that technical tools are not 100% accuracy.
Exponential moving average is most realistic and easily finds out the trendand its momentum as well.
Relative strength index gives clear signal of the stock in order to take afresh position by identifying the buying and selling signals and through outthe study it proved its accuracy.
MACD has been proved not reliable from this study.
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All technical tools will not give same result for the same stock.
Technical analysis can be applied to any market (except illiquid market)and instrument.
Technical analysis is a study of price, volume and open interest. All willmove hand in hand.
Technical analysis is all about study of charts, through this charts one canfind out the trend and price movements.
Technical analysis is a quick study and it is not a time consuming as likefundamental analysis.
Suggestions
Technical analysis shows its accuracy more on liquid market like NSE and
BSE,Use tools which are having good volume of trading.
Before using any tools one can thoroughly go through details about thetools which are using and then apply which makes sense.
Tools like RSI, MACD, EMA are really performing well through out thestudy and little more details needed to find out and judge their accuracy.
It is better to keep the application of technical analysis as simple as
Possible using some of the indicators.
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Focus on your potential risk and identifying your exit plan and it is easy tokeep emotions out of the game allowing you to think clearly and stick toyour tradingPlan.
You need to have a proven and consistent strategy that will allow you tofind winning stocks in any market environment.
Technical analysis is all about research study and one can study in detailabout each technical tool which can help the investors to indentifybehavior of the Stock easily.
Make an investment plan and select the few liquid stocks which, is helpfulto make a decent sound profit.
Make your own analysis by using technical tools instead of hearing falserumors.
Investors always keep in mind that follows the trend which you areidentified through tools and never follow the price.
ConclusionsIn general, we can conclude from the results that the technical indicators can playa useful role in the timing of stock market entry and exits. By applying technicalindicators, brokers or investors may enjoy substantial profits.
The moving average Convergence and Divergence policy gives greater totalprofit than the buy and hold Strategy. This study offers predictive ability oftechnical trading rules without trading costs environment in the market. The useof historical price information together with the current prices allows extra returnsto be generated.
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The findings confirm the predictive ability of moving averages and Convergenceand the Relative Strength Index with out taking cost of trading in to account. Mostsurvey studies indicate that technical analysis has been widely used by marketparticipants in futures markets and foreign exchange markets, and that at least30% to 40% of practitioners regard technical analysis as an important factor in
determining price movement at shorter time
Despite positive evidence about profitability and improved procedures for testingtechnical trading strategies, skepticism about technical trading profits remainswidespread among academics. Technical analysis may be partially self-fulfillingand thus its employment is likely to further increase its popularity. Thus it wassuggested that the usage of technical analysis would be likely to increasevolatility in stock markets. This may show that there are potential negativeimpacts on society as a whole of widespread usage of technical analysis,particularly through a reduction in physical investment.
Bibliography
Brock, W., J. Lakonishock, and B. LeBaron. Simple Technical Trading
information inefficiencies in a market with short-term speculators.Journal of Finance 47
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Fischer and Jordan. Security analysis and Portfolio management sixthedition
Lo, A.W., Mamaysky H. and Wang, J. 2000. Foundations of technical
Analysis:
Journal of Finance
Shiller, R.J., 1984, Stock Prices and Social Dynamics, Brookings Paperson Economic Activity, 2, Brookings Institution,
Sy W., 1990, Market Timing: Is It a Folly? Journal of PortfolioManagement
Technical Analysis , Capital Market Publisher, 2004
Mr. Livingston 1987 Reminiscences of stock operator
Dr. Alexander elder Coming to my trading room
http://www.stockcharts.com
http://www.investopedia.com
http://finance.yahoo.com
http://nseindia.com
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