Beruflich Dokumente
Kultur Dokumente
ON
“TECHNICAL ANALYSIS OF EQUITY”
Submitted To
(Session 2008-2010)
VCE Rohtak
MBA (2.4)
Signature
of the Candidate
SUPERVISOR’S CERTIFICATE
Signature of Supervisor
VCE Rohtak
PREFACE
The Present study is about the TECHNICAL ANALYSIS in India. Mainly the
focus is on the technality adopted by investors while doing investment in securities.
What is the present scenario prevalent in India was defined in this.
ACKNOWLEDGEMENT
I would also like to thank to all who provided me all the necessary
support and who took interest in providing me all the necessary
information that I required for the making of my study successful.
MONIKA VERMA
ROLL NO: 24
TABLE OF CONTENTS
Chapter 1 Introduction
• Objective
Chapter 6 Annexure
• Bibliography
Chapter-1
INTRODUCTION
WHAT’S THIS EQUITY ANALYSIS?
Professional investor will make more money & less loss than, who let their heart rule. Their
head eliminate all emotions for decision making. Be ruthless & calculating, you are out to make
money. Decision should be based on actual movement of share price measured both in money &
percentage term & nothing else. Greed must be avoided patience may be a virtue, but impatience
can frequently be profitable. In Equity Analysis anticipated growth, calculations are based on
considered FACTS & not on HOPE. Equity analysis is basically a combination of two
Independent analyses, namely fundamental analysis & Technical analysis.
The subject of Equity analysis, i.e. the attempt to determine future share price movement &
its reliability by references to historical data is a vast one, covering many aspect from the
calculating various FINANCIAL RATIOS, plotting of CHARTS to extremely sophisticated
indicators.
A general investor can apply the principles by using the simplest of tools: pocket calculator,
pencil, ruler, chart paper & your cautious mind, watchful attention. It should be pointed out that,
this equity analysis does not discuss how to buy & sell shares, but does discuss a method which
enables the investor to arrive at buying & selling decision. The financial analysts always need
yardsticks to evaluate the efficiency & performances of any business unit at the time of
investment. Fundamental analysis is useful in long term investment decision. In Fundamental
analysis company goodwill, its performances, liquidity, leverage, turnover, profitability &
financial health was checked & analysis with the help of ratio analysis for the purpose of long
term successful investment.
Technical analysis refers to the study of market generated data like prices & volume to
determine the future direction of prices movements. Technical analysis mainly seeks to predict
the short term price travels.
The focus of technical analysis is mainly on the internal market data, i.e. prices & volume
data. It appeals mainly to short term traders. It is the oldest approach to equity investment dating
back to the late 19th century.
Assumptions for the Equity Analysis
1.) Works only in normal share-market conditions with great reliability, it also Works in
abnormal share-market conditions, but with low reliability.
2.) Equity analysis is purely based on the INVESTMENT PHILOSOPHY, so the investment
object has vital importance associated to return along with risk.
3.) Cash management gets the magnitude role, because the scenario of equity analysis is
revolving around the term money.
4.) Portfolio management, risk management was up to the investor s knowledge.
5.) Capital market trend is always a friend, whether it is short run or long run.
6.) You are buying stock & not companies, so don t be curious or panic to do post-mortem of
companies performances.
7.) History repeats: investors & speculators react the same way to the same types of events
homogeneously.
8.) Capital market has a typical market psychology along with other issues like; perceptions, the
crowd the individual, tradition s & trust.
9.) An individual perceptions about the investment return & associated risk may differ from
individual to individual.
10.) Although the equity analysis is art as well as sciences so, it also has some exceptions.
EQUITY ANALYSIS
Technical analysis :-
“Technical analysis refers to the study of market generated data like prices & volume to
determine the future direction of prices movements.”
Technical analysis mainly seeks to predict the short term price travels. It is important criteria for
selecting the company to invest. It also provides the base for decision-making in investment. The
one of the most frequently used yardstick to check & analyze underlying price progress. For that
matter a verity of tools was consider. This Technical analysis is helpful to general investor in
many ways. It provides important & vital information regarding the current price position of the
company.
Technical analysis involves the use of various methods for charting, calculating & interpreting
graph & chart to assess the performances & status of the price. It is the tool of financial analysis,
which not only studies but also reflecting the numerical & graphical relationship between the
important financial factors.
The focus of technical analysis is mainly on the internal market data, i.e. prices & volume data. It
appeals mainly to short term traders. It is the oldest approach to equity investment dating back to
the late 19th century.
It uses charts and computer programs to study the stock’s trading volume and price movements
in the hope of identifying a trend. In fact the decision made on the basis of technical analysis is
done only after inferring a trend and judging the future movement of the stock on the basis of the
trend. Technical Analysis assumes that the market is efficient and the price has already taken into
consideration the other factors related to the company and the industry. It is because of this
assumption that many think technical analysis is a tool, which is effective for short-term
investing.
Usually the following tools & instruments are used to do the technical
analysis:
Price Fields
Technical analysis is based almost entirely on the analysis of price and volume. The fields which
define a security's price and volume are explained below.
Open - This is the price of the first trade for the period (e.g., the first trade of the day). When
analyzing daily data, the Open is especially important as it is the consensus price after all
interested parties were able to "sleep on it."
High - This is the highest price that the security traded during the period. It is the point at which
there were more sellers than buyers (i.e., there are always sellers willing to sell at higher prices,
but the High represents the highest price buyers were willing to pay).
Low - This is the lowest price that the security traded during the period. It is the point at which
there were more buyers than sellers (i.e., there are always buyers willing to buy at lower prices,
but the Low represents the lowest price sellers were willing to accept).
Close - This is the last price that the security traded during the period. Due to its availability, the
Close is the most often used price for analysis. The relationship between the Open (the first
price) and the Close (the last price) are considered significant by most technicians. This
relationship is emphasized in candlestick charts.
Volume - This is the number of shares (or contracts) that were traded during the period. The
relationship between prices and volume (e.g., increasing prices accompanied with increasing
volume) is important.
Open Interest - This is the total number of outstanding contracts (i.e., those that have not been
exercised, closed, or expired) of a future or option. Open interest is often used as an indicator.
Bid - This is the price a market maker is willing to pay for a security (i.e., the price you will
receive if you sell).
Ask - This is the price a market maker is willing to accept (i.e., the price you will pay to buy the
security).
Price Styles
2) Line Chart
It gives the detailed information about every aspect. The exchange rates for each time period are
plotted in a diagram and the points are joined. Prices on the y-axis, time on the x-axis.
The line chart chooses for example the closing price of consecutive time periods, but can also
work with daily, official fixings.
The relatively easy handling of line charts is a great advantage. Line charts do not show price
movements within a time period. This can be a problem because important information for
exchange rate analysis can be lost. This problem was remedied with the development of bar
charts that represent a more sophisticated form of line chart.
3) Candlestick Chart
A candlestick is black if the closing price is lower than the opening price. A candlestick is white
if the closing price is higher than the opening price.
In the 1600s, the Japanese developed a method of technical analysis to analyze the price of rice
contracts. This technique is called candlestick charting. Steven Nison is credited with
popularizing candlestick charting and has become recognized as the leading expert on their
interpretation.
Candlestick charts display the open, high, low, and closing prices in a format similar to a
modern-day bar chart but in a manner that extenuates the relationship between the opening and
closing prices. Candlestick charts are simply a new way of looking at prices, they don't involve
any calculations. Because candlesticks display the relationship between the open, high, low, and
closing prices, they cannot be displayed on securities that only have closing prices, nor were they
intended to be displayed on securities that lack opening prices.
The interpretation of candlestick charts is based primarily on patterns. The most popular patterns
are explained below.
(A)Bullish Patterns
1) Long white (empty) line. This is a bullish line. It occurs when prices open near the low
and close significantly higher near the period's high.
2) Hammer. This is a bullish line if it occurs after a significant downtrend. If the line occurs
after a significant up-trend, it is called a Hanging Man. A Hammer is identified by a small real
body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the
low is significantly lower than the open, high, and lose). The body can be empty or filled-in.
3) Piercing line. This is a bullish pattern and the opposite of a dark cloud cover. The first line is
a long black line and the second line is a long white line. The second line opens lower than the
first line's low, but it closes more than halfway above the first line's real body.
4) Bullish engulfing lines. This pattern is strongly bullish if it occurs after a significant
downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) line is
engulfed by a large bullish (empty) line.
5) Morning star. This is a bullish pattern signifying a potential bottom. The "star" indicates a
possible reversal and the bullish (empty) line confirms this. The star can be empty or filled-in.
6) Bullish doji star. A "star" indicates a reversal and a doji indicates indecision. Thus, this
pattern usually indicates a reversal following an indecisive period. You should wait for a
confirmation (e.g., as in the morning star, above) before trading a doji star. The first line can be
empty or filled in.
(B)Bearish Patterns
1) Long black (filled-in) line. This is a bearish line. It occurs when prices open near the high
and close significantly lower near the period's low.
2) Hanging Man. These lines are bearish if they occur after a significant uptrend. If this pattern
occurs after a significant downtrend, it is called a Hammer. They are identified by small real
bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e.,
the low was significantly lower than the open, high, and close). The bodies can be empty or
filled-in.
2) Dark cloud cover. This is a bearish pattern. The pattern is more significant if the second
line's body is below the center of the previous line's body (as illustrated).
4) Bearish engulfing lines. This pattern is strongly bearish if it occurs after a significant uptrend
(i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) line is engulfed by a
large bearish (filledin) line.
5) Evening star. This is a bearish pattern signifying a potential top. The "star" indicates a
possible reversal and the bearish (filled-in) line confirms this. The star can be empty or filled in.
5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually
indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as
in the evening star illustration) before trading a doji star.
6) Shooting star. This pattern suggests a minor reversal when it appears after a rally. The star's
body must appear near the low price and the line should have a long upper shadow.
(C) Reversal Patterns
1) Long-legged doji. This line often signifies a turning point. It occurs when the open and close
are the same, and the range between the high and low is relatively large.
3) Dragon-fly doji. This line also signifies a turning point. It occurs when the open and
close are the same, and the low is significantly lower than the open, high, and closing
prices.
3) Gravestone doji. This line also signifies a turning point. It occurs when the open, close, and
low are the same, and the high is significantly higher than the open, low, and closing prices.
4) Star. Stars indicate reversals. A star is a line with a small real body that occurs after a line
with a much larger real body, where the real bodies do not overlap. The shadows may overlap.
5) Doji star. A star indicates a reversal and a doji indicates indecision. Thus, this pattern usually
indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as
in the evening star illustration) before trading a doji star.
(C)Neutral Patterns
1) Spinning tops. These are neutral lines. They occur when the distance between the high and
low, and the distance between the open and close, are relatively small.
2) Doji. This line implies indecision. The security opened and closed at the same price. These
lines can appear in several different patterns. Double doji lines (two adjacent doji lines) imply
that a forceful move will follow a breakout from the current indecision.
3) Harami :- This pattern indicates a decrease in momentum. It occurs when a line with a small
body falls within the area of a larger body. In this example, a bullish (empty) line with a long
body is followed by a weak bearish (filledin) line. This implies a decrease in the bullish
momentum.
4) Harami cross. This pattern also indicates a decrease in momentum. The pattern is similar to a
harami, except the second line is a doji (signifying indecision).
Example:
There are lots of ups and downs in this chart, but there isn't a clear indication of which direction
this security is headed.
Types of Trend
There are three types of trend:
1. Uptrend
2. Downtrend
3. Sideways/Horizontal Trends
As the names imply, when each successive peak and trough is higher, it's referred to as an
upward trend. If the peaks and troughs are getting lower it's a downtrend. When there is little
movement up or 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 sideways trend is actually not a trend on its
own, but a lack of a well-defined trend in either direction. In any case, the market can really only
trend in these three ways: up, down or nowhere.
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 trend or a short-term trend. In terms
of the stock market, a major trend is generally categorized as one lasting longer than a year. An
intermediate trend is considered to last between one and three months and a near-term trend is
anything less than a month.
A long-term trend is composed of several intermediate trends, which often move against the
direction of the major trend. If the major trend is upward and there is a downward correction in
price movement followed by a continuation of the uptrend, the correction is considered to be an
intermediate trend. The short-term trends are components of both major and intermediate trends.
When analyzing trends, it is important that the chart is constructed to bestreflect the type of trend
being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-
year period are used by chartists to get a better idea of the long-term trend. Daily data charts are
best used when analyzing both intermediate and short-term trends. It is also important 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.
Trend Lines
A trend line is a simple charting technique that adds a line to a chart to represent the trend in the
market or a stock. Drawing a trend line is as simple as drawing a straight line that follows a
general trend. These lines are used to clearly show the trend and are also used in the
identification of trend reversals.
An upward trend line is drawn at the lows of an upward trend. This line represents the support
the stock has every time it moves from a high to a low. Notice how the price is propped up by
this support. This type of trend line helps traders to anticipate the point at which a stock's price
will begin moving upwards again. Similarly, a downward trend line is drawn at the highs of the
downward trend. This line represents the resistance level that a stock faces every time the price
moves from a low to a high.
Channels
A channel, or channel lines, is the addition of two parallel trend lines that act as strong areas of
support and resistance. The upper trend line connects a series of highs, while the lower trend line
connects a series of lows. A channel can slope upward, downward or sideways but, regardless of
the direction, the interpretation remains the same. Traders will expect a given security to trade
between the two levels of support and resistance until it breaks beyond one of the levels, in
which case 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 areas of
support and resistance.
A descending channel on a stock chart; the upper trend line has been placed on the highs and the
lower trend line is on the lows. The price has bounced off of these lines several times, and has
remained range bound for several months. As long as the price does not fall below the lower line
or move beyond the upper resistance, the range-bound downtrend is expected to continue.
The Importance of Trend
It is important to be able to understand and identify trends so that you can trade with rather than
against them. Two important sayings in technical analysis are "the trend is your friend" and
"don't buck the trend," illustrating how important trend analysis is for technical traders.
Importance of volume:-
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.
A chart pattern is a distinct formation on a stock chart that creates a trading signal, or a sign of
future price movements. Chartists use these patterns to identify current trends and trend reversals
and to trigger buy and sell signals.
In the first section of this tutorial, we talked about the three assumptions of technical analysis,
the third of which was that in technical analysis, history repeats itself. The theory behind chart
patters is based on this assumption. The idea is that certain patterns are seen many times, and that
these patterns signal a certain high probability move in a stock. Based on the historic trend of a
chart pattern setting up a certain price movement, chartists look for these Patterns to identify
trading opportunities. While there are general ideas and components to every chart pattern, there
is no chart pattern that will tell you with 100% certainty where a security is headed. This creates
some leeway and debate as to what a good pattern looks like, and is a major reason why charting
is often seen as more of an art than a science. There are two types of patterns within this area of
technical analysis, reversal and continuation. A reversal pattern signals that a prior trend will
reverse upon completion of the pattern. A continuation pattern, on the other hand, signals that a
trend will continue once the pattern is complete. These patterns can be found over charts of any
timeframe. In this section, we will review some of the more popular chart patterns.
4. Triangles
Triangles are some of the most well-known chart patterns used in technical analysis. The three
types of triangles, which vary in construct and implication, are the symmetrical triangle,
ascending and descending triangle. These chart patterns are considered to last anywhere from a
couple of weeks to several months.
The symmetrical is a pattern in which two trend lines converge toward each other. This pattern is
neutral in that a breakout to the upside or downside is a confirmation of a trend in that direction.
In an ascending triangle, the upper trend line is flat, while the bottom trend line is upward
sloping. This is generally thought of as a bullish pattern in which chartists look for an upside
breakout. In a descending triangle, the lower trend line is flat and the upper trend line is
descending. This is generally seen as a bearish pattern where chartists look for a downside
breakout.
5. Flag and Pennants
These two short-term chart patterns are continuation patterns that are formed when there is a
sharp price movement followed by a generally sideways price movement. This pattern is then
completed upon another sharp price movement in the same direction as the move that started the
trend. The patterns are generally thought to last from one to three weeks.
There is little difference between a pennant and a flag. The main difference between these price
movements can be seen in the middle section of the chart pattern. In a pennant, the middle
section is characterized by converging trend lines, much like what is seen in a symmetrical
triangle. The middle section on the flag pattern, on the other hand, shows a channel pattern, with
no convergence between the trend lines. In both cases, the trend is expected to continue when the
price moves above the upper trend line.
6. Wedge
The wedge chart pattern can be either a continuation or reversal pattern. It is similar to a
symmetrical triangle except that the wedge pattern slants in an upward or downward direction,
while the symmetrical triangle generally shows a sideways movement. The other difference is
that wedges tend to form over longer periods, usually between three and six months.
The fact that wedges are classified as both continuation and reversal patterns can make reading
signals confusing. However, at the most basic level, a falling wedge is bullish and a rising wedge
is bearish. We have a falling wedge in which two trend lines are converging in a downward
direction. If the price was to rise above the upper trend line, it would form a continuation pattern,
while a move below the lower trend line would signal a reversal pattern.
Confusion can form with triple tops and bottoms during the formation of the pattern because they
can look similar to other chart patterns. After the first two support/resistance tests are formed in
the price movement, the pattern will look like a double top or bottom, which could lead a chartist
to enter a reversal position too soon.
8.Rounding Bottom
A rounding bottom, also referred to as a saucer bottom, is a long-term reversal pattern that
signals a shift from a downward trend to an upward trend. This pattern is traditionally thought to
last anywhere from several Months to several years.
A rounding bottom chart pattern looks similar to a cup and handle pattern but without the handle.
The long-term nature of this pattern and the lack of a confirmation trigger, such as the handle in
the cup and handle, make it a difficult patter.
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 the ongoing battle between the bulls
and the bears, or the struggle between buyers (demand) and sellers (supply). This is revealed by
the prices a security seldom moves above (resistance) or below (support).
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).
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 likely be
established.
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 is important that the price make a strong move through either the support or
resistance.
For example, as you can see, 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, 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.
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.
Summary of charts
MOVING AVERAGES:-
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 simple method traders use to combat this
is to apply moving averages. A moving 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.
Many individuals argue that the usefulness of this type of average is limited because 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.
2. Linear Weighted Average
This 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 theperiod range is reached. These numbers are then added together and
divided by the sum of the multipliers.
Another method of determining momentum is to look at the order of a pair of moving averages.
When a short-term average is above a longer-term average, the trend is up. On the other hand, a
long-term average above a shorter-term average signals a downward movement in the trend.
Moving average trend reversals are formed in two main ways: when the price moves through a
moving average and when it moves through moving average crossovers. The first common signal
is when the price moves through an important moving average. For example, when the price of a
security that was in an uptrend falls below a 50-period moving average, it is a sign that the
uptrend may be reversing.
The other signal of a trend reversal is when one moving average crosses through another. For
example, 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.
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.
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
the 200-day moving average in a downward direction, it is a signal that the uptrend is reversing.
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 be a 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.
Objective of the study:
Review of Literature
Review of Literature
The principles of technical analysis derive from the observation of financial markets over
hundreds of years. The oldest known hints of technical analysis appear in Joseph de la Vega's
accounts of the Dutch markets in the 17th century. In Asia, the oldest example of technical
analysis is thought to be a method developed by Homma Munehisa during early 18th century
which evolved into the use of candlestick techniques, and is today a main charting tool.
Dow Theory is based on the collected writings of Dow Jones co-founder and Editor Charles
Dow, and inspired the use and development of modern technical analysis from the end of the
19th century. Other pioneers of analysis techniques include Ralph Nelson Elliott and William
Delbert Gann who developed their respective 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.
Technical analysis is widely used among traders and financial professionals, and is very often
used by active day traders, market makers, and pit traders. In the 1960s and 1970s it was widely
dismissed by academics. In a recent review, Irwin and 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 was
inconclusive; it is still considered by many academics to be pseudoscience. Academics such as
Eugene Fama say the evidence for technical analysis is sparse 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 to identify trading opportunities.
In the foreign exchange markets, its use may be more widespread than fundamental
analysis.While some isolated studies have indicated that technical trading rules might lead to
consistent returns in the period prior to 1987, most academic work has focused on the nature of
the anomalous position of the foreign exchange market. It is speculated that this anomaly is due
to central bank intervention. Recent research suggests that combining various trading signals into
a Combined Signal Approach may be able to increase profitability and reduce dependence on
any single rule.
Critics of technical analysis include well-known fundamental analysts. For example, Peter Lynch
once commented, "Charts are great for predicting the past." Warren Buffett has said, "I realized
technical analysis didn't work when I turned the charts upside down and didn't get a different
answer" and "If past history was all there was to the game, the richest people would be
librarians."
An influential 1992 study by Brock et al. which appeared to find support for technical trading
rules was tested for data snooping and other problems in 1999; the sample covered by Brock et
al. was robust to data snooping.
Subsequently, a comprehensive study of the question by Amsterdam economist Gerwin
Griffioen concludes that: "for the U.S., Japanese and most Western European stock market
indices the recursive out-of-sample forecasting procedure does not show to be profitable, after
implementing little transaction costs. Moreover, for sufficiently high transaction costs it is found,
by estimating CAPMs, that technical trading shows no statistically significant risk-corrected out-
of-sample forecasting power for almost all of the stock market indices.Transaction costs are
particularly applicable to "momentum strategies"; a comprehensive 1996 review of the data and
studies concluded that even small transaction costs would lead to an inability to capture any
excess from such strategies.
In a paper published in the Journal of Finance Dr. Andrew W. Lo, director MIT Laboratory
for Financial Engineering, working with Harry Mamaysky and Jiang Wang found that
"Technical analysis, also known as "charting," has been a part of financial practice for many
decades, but this discipline has not received the same level of academic scrutiny and acceptance
as more traditional approaches such as fundamental analysis. One of the main obstacles is the
highly subjective nature of technical analysis---the presence of geometric shapes in historical
price charts is often in the eyes of the beholder. In this paper, we propose a systematic and
automatic approach to technical pattern recognition using nonparametric kernel regression, and
apply this method to a large number of U.S. stocks from 1962 to 1996 to evaluate the
effectiveness of technical analysis. By comparing the unconditional empirical distribution of
daily stock returns to the conditional distribution---conditioned on specific technical indicators
such as head-and-shoulders or double-bottoms---we find that over the 31-year sample period,
several technical indicators do provide incremental information and may have some practical
value." In that same paper Dr. Lo wrote that "several academic studies suggest that...technical
analysis may well be an effective means for extracting useful information from market prices."
Some techniques such as Drummond Geometry attempt to overcome the past data bias by
projecting support and resistance levels from differing time frames into the near-term future and
combining that with reversion to the mean techniques.
Chapter-3
RESEARCH METHODOLOGY
RESEARCH METHODOLOGY
Research Methodology is a way to systematically solve the research problem. The research
begins its formation when the problem or objective of the research is identified for which a
research report is conduced. The main objective for which this report is carried out is to make an
analytical study of derivatives- an instrument of hedging..
RESERCH DESIGN :-
There are various methods of research design like Exploratory Research Design, Descriptive
Research Design, Diagnostic Research Design, Deign and Hypothesis Testing Research Design.
SOURCES OF DATA :-
1. Primary data
2. Secondary data
In the present study, secondary data has been used. I have collected Secondary data from the
different books and magazines on stock exchange and websites of stock exchange.
1. Questionnaire method
2. Observation Method
3. Survey Method
4. Experimentation Method
In the present study, observation method has been used.
LIMITATIONS of the STUDY
World have so many things, all things have two aspects one is advantages and another is
disadvantages, according to this, my project also has some Limitations that are given
below.Although maximum efforts have been put to make the research project comprehensive and
free from any biases, still the scope of project is limited due to some unavoidable reasons. Some
of the reasons are given below.
• LIMITED TIME: There was limited time in which this project has to be completed.
Therefore it was a major limitation.
• LIMITED SCOPE: It was not possible to contact with experts & technicians.
Technical Indicators
1) ACCUMULATION/DISTRIBUTION
Overview
The Accumulation/Distribution is a momentum indicator that associates changes in price and
volume. The indicator is based on the premise that the more volume that accompanies a price
move, the more significant the price move.
Interpretation
The Accumulation/Distribution is really a variation of the more popular On Balance
Volume indicator. Both of these indicators attempt to confirm changes in prices by comparing
the volume associated with prices.
When the Accumulation/Distribution moves up, it shows that the security is being
accumulated, as most of the volume is associated with upward price movement. When the
indicator moves down, it shows that the security is being distributed, as most of the volume is
associated with downward price movement. Divergences between the Accumulation/Distribution
and the security's price imply a change is imminent. When a divergence does occur, prices
usually change to confirm the Accumulation/Distribution. For example, if the indicator is
moving up and the security's price is going down, prices will probably reverse.
Overview
Bollinger Bands are similar to moving average envelopes. The difference between Bollinger
Bands and envelopes is envelopes are plotted at a fixed percentage above and below a moving
average, whereas Bollinger Bands are plotted at standard deviation levels above and below a
moving average. Since standard deviation is a measure of volatility, the bands are self-adjusting:
widening during volatile markets and contracting during calmer periods. Bollinger Bands were
created by John Bollinger.
Interpretation
Bollinger Bands are usually displayed on top of security prices, but they can be displayed on an
indicator. These comments refer to bands displayed on prices. As with moving average
envelopes, the basic interpretation of Bollinger Bands is that prices tend to stay within the upper-
and lower-band. The distinctive characteristic of Bollinger Bands is that the spacing between the
bands varies based on the volatility of the prices. During periods of extreme price changes (i.e.,
high volatility), the bands widen to become more forgiving. During periods of stagnant pricing
(i.e., low volatility), the bands narrow to contain prices.
Following are characteristics of Bollinger Bands.
• Sharp price changes tend to occur after the bands tighten, as volatility lessens.
• When prices move outside the bands, a continuation of the current trend is implied.
• Bottoms and tops made outside the bands followed by bottoms and tops made inside the bands
call for reversals in the trend.
• A move that originates at one band tends to go all the way to the other band. This observation is
useful when projecting price targets.
Overview
The Commodity Channel Index ("CCI") measures the variation of a security's price from its
statistical mean. High values show that prices are unusually high compared to average prices
whereas low values indicate that prices are unusually low. Contrary to its name, the CCI can be
used effectively on any type of security, not just commodities.
Interpretation
There are two basic methods of interpreting the CCI: looking for divergences and as an
overbought/oversold indicator.
• A divergence occurs when the security's prices are making new highs while the CCI is failing
to surpass its previous highs. This classic divergence is usually followed by a correction in the
security's price.
• The CCI typically oscillates between 100. To use the CCI as an overbought/oversold indicator,
readings above +100 imply an overbought condition (and a pending price correction) while
readings below -100 imply an oversold condition (and a pending rally).
4.) ENVELOPES (TRADING BANDS)
Overview
An envelope is comprised of two moving averages. One moving average is shifted upward and
the second moving average is shifted downward.
Interpretation
Envelopes define the upper and lower boundaries of a security's normal trading range. A sell
signal is generated when the security reaches the upper band whereas a buy signal is generated at
the lower band. The optimum percentage shift depends on the volatility of the security--the more
volatile, the larger the percentage. The logic behind envelopes is that overzealous buyers and
sellers push the price to the extremes (i.e., the upper and lower bands), at which point the prices
often stabilize by moving to more realistic levels. This is similar to the interpretation of Bollinger
Bands.
5.) MACD
Overview
The MACD ("Moving Average Convergence/Divergence") is a trend following momentum
indicator that shows the relationship between two moving averages of prices. The MACD was
developed by Gerald Appel, publisher of Systems and Forecasts. The MACD is the difference
between a 26-day and 12-day exponential moving average. A 9-day exponential moving average,
called the "signal" (or "trigger") line is plotted on top of the MACD to show buy/sell
opportunities. (Appel specifies exponential moving averages as percentages. Thus, he refers to
these three moving averages as 7.5%, 15%, and 20% respectively.)
Interpretation
The MACD proves most effective in wide-swinging trading markets. There are three popular
ways to use the MACD: crossovers, overbought/oversold conditions, and divergences.
Crossovers
The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a
buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when
the MACD goes above/below zero.
Overbought/Oversold Conditions
The MACD is also useful as an overbought/oversold indicator. When the shorter moving average
pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that
the security price is overextending and will soon return to more realistic levels. MACD
Overbought and oversold conditions exist vary from security to security.
Divergences
A indication that an end to the current trend may be near occurs when the MACD diverges from
the security. A bearish divergence occurs when the MACD is making new lows while prices fail
to reach new lows. A bullish divergence occurs when the MACD is making new highs while
prices fail to reach new highs. Both of these divergences are most significant when they
Occur at relatively overbought/oversold levels.
6.) MOMENTUM
Overview
The Momentum indicator measures the amount that a security's price has changed over a given
time span.
Interpretation
The interpretation of the Momentum indicator is identical to the interpretation of the Price ROC.
Both indicators display the rate-of-change of a security's price. However, the Price ROC
indicator displays the rate-of-change as a percentage whereas the Momentum indicator displays
the rate-of-change as a ratio.
7.) ON BALANCE VOLUME
Overview
On Balance Volume ("OBV") is a momentum indicator that relates volume to price change. On
Balance Volume was developed by Joe Granville.
Interpretation
On Balance Volume is a running total of volume. It shows if volume is flowing into or out of a
security. When the security closes higher than the previous close, all of the day's volume is
considered up-volume. When the security closes lower than the previous close, all of the day's
volume is considered down-volume.
Interpretation
Moving average analysis typically generates buy signals when a short-term moving average (or
the securities price) rises above a longer-term moving average. Conversely, sell signals are
generated when a shorter-term moving average (or the security’s price) falls below a longer-term
moving average. The Price Oscillator illustrates the cyclical and often profitable signals
generated by these one- or two-moving-average systems.
9.) VOLUME
Overview
Volume is simply the number of shares (or contracts) traded during a specified time frame (e.g.,
hour, day, week, month, etc). The analysis of volume is a basic yet very important element of
technical analysis. Volume provides clues as to the intensity of a given price move.
Interpretation
Low volume levels are characteristic of the indecisive expectations that typically occur during
consolidation periods (i.e., periods where prices move sideways in a trading range). Low volume
also often occurs during the indecisive period during market bottoms. High volume levels are
Characteristic of market tops when there is a strong consensus that prices will move higher. High
volume levels are also very common at the beginning of new trends (i.e., when prices break out
of a trading range). Just before market bottoms, volume will often increase due to panic-driven
Selling. Volume can help determine the health of an existing trend. A healthy up-trend should
have higher volume on the upward legs of the trend, and lower volume on the downward
(corrective) legs. A healthy downtrend usually has higher volume on the downward legs of the
trend and lower volume on the upward (corrective) legs.
10.) VOLUME OSCILLATOR
Overview
The Volume Oscillator displays the difference between two moving averages of a security's
volume. The difference between the moving averages can be expressed in either points or
percentages.
Interpretation
We can use the difference between two moving averages of volume to determine if the overall
volume trend is increasing or decreasing. When the Volume Oscillator rises above zero, it
signifies that the shorter-term volume moving average has risen above the longer-term volume
moving average, and thus, that the short-term volume trend is higher (i.e., more volume) than the
longer-term volume trend.
There are many ways to interpret changes in volume trends. One common belief is that rising
prices coupled with increased volume, and falling prices coupled with decreased volume, is
bullish. Conversely, if volume increases when prices fall, and volume decreases when prices rise,
the market is showing signs of underlying weakness. The theory behind this is straight forward.
Rising prices coupled with increased volume signifies increased upside participation (more
buyers) that should lead to a continued move. Conversely, falling prices coupled with increased
volume (more sellers) signifies decreased upside participation.
Chapter-6
FINDINGS
SUGGESTIONS
People should be more aware and educated about Technical analysis of securities.
The investment tools should be used by investors keeping in mind various risk factors.
Future uncertainty should be considered as a major influencing element while doing the
investments.
Chapter-7
Annexure
BIBLIOGRAPHY-
BOOKS:
1. M. Ranganatham & R. Madhumathi “ Investment Analysis & portfolio Management, Pearson
Publication
2. Punithavathy Pandian, “ Security analysis and portfolio management, Vikas publication.
3. Chandra Prasanna, “ investment Analysis & portfolio management , TMH publication
4. Nabhis, “Manual of SEBI” , A Nabhi Publication, Vol-2
5. Varshney P.N,“Indian Financial System” Sultan Chand & Sons, Educational Publisher , New
Delhi,2002
6. Kothari, C.R., “Research Methodology- Methods and Technique”, Willay International Ltd.
7. Ward, P., & Davies, B. J. (1999). The diffusion of interactive technology at the customer
interface. International Journal of Technology Management, 17(1/2),
1. Business India
2. Business Today
3. Business Line
4. Capital Market
WEBSITE:
1. www.investopedia.com
2. www.scribd.com
3. business.mapsofindia.com
4. www.ehow.com
5. www.Technical analysis.com