You are on page 1of 60

[Type the document title]

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 quantifiable market data, whilst fundamental analysis includes data related to the market situation, time of year, company prospects and so forth. Technical analysis has attracted a large following amongst trading practitioners but has been criticized in the past by theoreticians. It should be noted, however, that more recent studies in the literature have given some support to the technical approach. 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 Munches 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.

General description
Technical analysts seek to identify price patterns and trends in financial markets and attempt to exploit those patterns. While technicians use various methods and tools, the study of price charts is primary. Technicians especially search for archetypal patterns, such as the well-known head and shoulders or double top reversal patterns, study indicators such as moving 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 typically mathematical transformations of price or volume. These indicators are used to help 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 of futures, open interest. Examples include the relative strength index, and MACD. Other avenues of study include correlations between changes in options (implied volatility) and put/call ratios with price. Other technicians include sentiment indicators, such as Put/Call ratios and Implied Volatility in their analysis.

GUPTA COLLEGE

[Type the document title]

Technicians seek to forecast price movements such that large gains from successful trades exceed more numerous but smaller losing trades, producing positive returns in the long run through proper risk control and money management. Technical analysis is frequently contrasted with fundamental analysis, the study of economic factors that influence prices in financial markets. Technical analysis holds that prices already reflect all such influences before investors are aware of them, hence the study of price action alone. Users of technical analysis are most often called technicians or market technicians. Some prefer the term technical market analyst or simply market analyst. An older term, chartist, is sometimes used, but as the discipline has expanded and modernized the use of the term chartist has become less popular.

Characteristics
Technical analysis employs models and trading rules based on price and volume transformations, such as the relative strength index, moving averages, inter-market and intra-market price correlations, cycles or, classically, through recognition of chart patterns. Technical analysis stands in contrast to the fundamental analysis approach 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 at the actual facts of the company, market, currency or commodity. For example, any large brokerage, trading group, or financial institution will typically have both a technical analysis and fundamental analysis team. 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.

Technical stock analysis is based on three basic principles namely: 1. Market action discounts everything. 2. Prices move in trends. 3. History repeats itself.
GUPTA COLLEGE

[Type the document title]

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 they say news and news events do not significantly influence price, and cite supporting 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 the press cites as the cause of the market move is not particularly important. Press reports on adjacent days also fail to reveal any convincing accounts of why future profits or discount rates might have changed. Our inability to identify the fundamental shocks that accounted for these significant market moves is difficult to reconcile with the view that such shocks account for most of the variation in stock returns.

Prices move in trends:


Technical analysts believe that prices trend directionally, i.e., up, down, or sideways (flat) or some combination. The basic definition of a price trend was originally put forward by Dow Theory. Each time the stock moved lower, it fell below its previous relative low price. Each time the stock moved higher, it could not reach the level of its previous relative high price.

History tends to repeat itself:


Technical analysts believe that investors collectively repeat the behavior of the investors that preceded them. "Everyone wants in on the next Microsoft," "If this stock ever gets to $50 again, I will buy it," "This company's technology will revolutionize its industry, therefore this stock will skyrocket" these are all examples of investor sentiment repeating itself. To a technician, the emotions in the market may be irrational, but they exist. Because investor behavior repeats itself so often, technicians believe that recognizable (and predictable) price patterns 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. These surveys gauge the attitude of market participants, specifically whether they are bearish or bullish. Technicians use these surveys to help determine whether a trend will continue or if a reversal could develop; they are most likely to anticipate a change when the surveys report extreme investor sentiment. Surveys that show overwhelming bullishness, for example, are evidence that an uptrend may reverse the premise being that if most investors are bullish they have already
GUPTA COLLEGE

[Type the document title]


bought the market (anticipating higher prices). And because most investors are bullish and invested, one assumes that few buyers remain. This leaves more potential sellers than buyers, despite the bullish sentiment. This suggests that prices 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 best time 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 national organizations and the Market Technicians Association (MTA). In the United States, 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 Security Analysts Association of San Francisco (TSAASF). In the United Kingdom, the industry is represented by the Society of Technical Analysts (STA). In Canada the industry is represented by the Canadian Society of Technical Analysts. Additional major professional technical analysis organizations are noted in the External Links section below. Professional technical analysis societies have worked on creating a body of knowledge that describes the field of Technical Analysis. A body of knowledge is

GUPTA COLLEGE

[Type the document title]


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 developing proper research and standards for the field. The Market Technicians Association (MTA) has published a body of knowledge, which is the structure for the MTA's Chartered Market Technician (CMT) exam.

Use
Traders generally share the view that trading in the direction of the trend is the most effective means to be profitable in financial or commodities markets. John W. Henry, Larry Hite, Ed Seykota, Richard Dennis, William Eckhardt, Victor Sperandeo, Michael Marcus and Paul Tudor Jones (some of the so-called Market Wizards in the popular book of the same name by Jack D. Schwager) have each amassed massive fortunes via the use of technical analysis and its concepts. George Lane, a technical analyst, coined one of the most popular phrases on Wall Street, "The trend is your friend!".

Types of charts
OHLC "Bar Charts" - Open-High-Low-Close charts, also known as bar charts, plot the span between the high and low prices of a trading period as 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 left for the open price and a tick to the right for the closing price. Candlestick chart - Of Japanese origin and similar to OHLC, candlesticks widen and fill the interval between the open and close prices to emphasize the open/close relationship. In the West, often black or red candle bodies represent a close lower than the open, while white, green or blue candles represent a close higher than the open price. Line chart - Connects the closing price values with line segments. Point and figure chart - a chart type employing numerical filters with only passing references 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, accompanied by an increase in volume. Trending - the phenomenon by which price movement tends to persist in one direction for an extended period of time Momentum - the rate of price change

GUPTA COLLEGE

[Type the document title]

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 nontrending 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.

GUPTA COLLEGE

[Type the document title]

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:

GUPTA COLLEGE

[Type the document title]

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 is determined 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 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.

GUPTA COLLEGE

[Type the document title]

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. Take a look a Figure 4 to get a sense of how these three trend lengths might look.

Figure 4

When analyzing trends, it is important that the chart is constructed to best


GUPTA COLLEGE

[Type the document title]


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 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. 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.

As you can see in Figure 5, 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.

Figure 5

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

GUPTA COLLEGE

[Type the document title]


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.

Figure 6

Figure 6 illustrates 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. Conclusion 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.

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 the ongoing battle between the bulls and the bears, or the struggle between buyers

GUPTA COLLEGE

[Type the document title]


(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.

GUPTA COLLEGE

[Type the document title]

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.

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.

GUPTA COLLEGE

[Type the document title]

The Importance of Volume To this point, we've only discussed the price of a security. While price is the primary 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 weak volume. Therefore, if you are looking at a large price movement, you should also

GUPTA COLLEGE

[Type the document title]


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 trading opportunities in prices movements.

Figure 3

GUPTA COLLEGE

[Type the document title]


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 and support.

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 this level. 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 expected to 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

GUPTA COLLEGE

[Type the document title]


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 simple method traders use to combat this is to apply moving averages. A moving
GUPTA COLLEGE

[Type the document title]


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-today 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 in the 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.

GUPTA COLLEGE

[Type the document title]

Figure 1

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.

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 the period range is reached. These numbers are then added together and divided by the sum of the multipliers.

GUPTA COLLEGE

[Type the document title]

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 15period 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. As you can see in Figure 3, when a moving average is heading upward and the
GUPTA COLLEGE

[Type the document title]


price is above it, the security is in an uptrend. Conversely, a downward sloping moving average with the price below can be used to signal a downtrend.

Figure 3

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, like in Figure 4, it is a sign that the uptrend may be reversing.

GUPTA COLLEGE

[Type the document title]

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.

GUPTA COLLEGE

[Type the document title]


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.

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 200day, 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

GUPTA COLLEGE

[Type the document title]

Crossover

The point on a stock chart when a security and an indicator intersect. Crossovers are used by techn

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 whic

a signal to buy the stock. Some of the indicators that use crossovers are "moving average" and "Bollinger ba

GUPTA COLLEGE

[Type the document title]

2.2 Relative Strength Index


The relative strength index (RSI) is another one of the most used and wellknown 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. If prices 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 a Weekly chart being used. However variations of 14 days are also used. Shorter the time period, more sensitive the oscillator becomes and wider The indicator is plotted in a range between zero and 100. A reading above 70 is used to suggest that a security is overbought, while a reading below 30 is used to suggest that it is oversold. This indicator helps traders to identify whether a securitys price has been unreasonably pushed to current levels and whether a reversal may be on the way.

The standard calculation for RSI uses 14 trading days as the basis, which can be adjusted 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

GUPTA COLLEGE

[Type the document title]

Interpretation
RSI is plotted on a vertical scale of 0 to 100. The 70% and 30% levels are used as 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 overbought reading in a 9-day RSI is not nearly as significant as an RSI for a 12-month period. An overbought or oversold condition merely indicates that there is a high probability of a counter reaction. It is an indication that there may be an opportunity to buy or sell, but does not provide the final signal. RSI signals should always be used in conjunction with trend-reversal signals offered by the price itself. RSI can be plotted for any time span. Wilder originally recommended using a 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 user is trading short-term moves, the time period can be shortened. Lengthening the time period makes the oscillator smoother and narrower in amplitude. In using RSI, 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 by some traders. Signals Tops & Bottoms, Failure Swings, Divergence Traders watch for double tops or what Wilder referred to as "failure swings." If the RSI makes a double top formation, with the first top above 70% and the second top below the first, you get a sell signal when the RSI falls below the level of the dip. 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 RSI breaks above the Previous peak. These failure swings can lead to divergences between the price action and the RSI. 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 an indication of an impending reversal. In Wilder's opinion, divergences are the most important signal provided by RSI.

Trend lines
RSI trend lines can provide good signals, particularly when used in conjunction with price patterns. When both price and RSI trend lines are violated within a short period you could have an important buy or sell signal.

GUPTA COLLEGE

[Type the document title]


RSI is used in various forms including Touch , Peak , Retracement and 50 Crossover methods. The touch method generates a buy signal when the RSI touches the lower bound (typically set at 30) which indicates that the market is oversold 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 is overbought and hence a time to sell. The peak method generates a buy signal when the RSI has crossed the lower bound (typically set at 30) and turned back. It generates a sell signal when the RSI has crossed the upper bound (typically set at 70) and turned back. The retracement method generates a buy signal when the RSI has crossed the lower bound (typically set at 30) and retraced back to the same lower bound or higher. It generates a sell signal when the RSI has crossed the upper bound (typically set at 70) and retraced back to the same upper bound or 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 by using a nine-day exponential moving average of the MACD values. These values

GUPTA COLLEGE

[Type the document title]


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 MACD histogram. 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.

GUPTA COLLEGE

[Type the document title]


Signals are generated in multiple ways. Since the MACD is an oscillator, simple up crossings across the zero line are considered bullish; correspondingly, down crossings are considered bearish. In addition, the MACD statistic is often plotted against its own 9 day exponential moving average. Up crossings of the MACD against its moving average are considered bullish; down crossings are bearish. It consists of the indicator curve, the zero line, and a trigger line. The indicator curve depicts the vertical distance between two exponential moving average curves 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 average curves would intersect if plotted separately. As prices move further away from the trend indicated by the longer-term moving average, the MACD indicator line becomes more positive or negative, depending upon the direction of price movement. As prices move closer to the trend, the MACD indicator approaches zero. By first smoothing the price volatility with the short-term moving average, then smoothing the indicator with the trigger line, it is believed the MACD provides very reliable trend reversal and confirmation signals. An exponential moving average of MACD for t periods you specify is plotted on top of the MACD as a trigger line. Interpretation: Buy (sell) when MACD crosses above (below) the trigger line or zero line. Look for divergence between price data and MACD curve. The MACD proves 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 changing the moving averages and found that shorter moving averages did indeed speed up the signals. However, he was looking for a means to anticipate MACD crossovers and came up with the MACD Histogram The MACD Histogram represents the difference between MACD and it's signal line (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 the bars are drawn above the zero line.\ If the MACD line is below the signal line, histogram is negative, and the bars are drawn below the zero line. Sharp increases in the MACD-H indicate that MACD is rising faster than its 9-day EMA and upward momentum is strengthening. Sharp declines in the MACD-H

GUPTA COLLEGE

[Type the document title]


indicate that MACD is falling faster than its moving average and downward momentum is increasing. Divergences between MACD and MACD-H are the main tool used to anticipate crossovers. 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 and can act to foreshadow a bearish moving average crossover in MACD.

Signals The main signal generated by the MACD-Histogram is a divergence from MACD followed by a zero-line crossover. A bullish signal is generated when a positive divergence forms and there is an upward zero line cross over. A bearish signal is generated when there is a negative divergence and a downward zero line cross over. In Technical Analysis of the Financial Markets, John Murphy states that the real value of the MACD-H is spotting when the spread between the two lines is widening or narrowing. When the histogram is above its zero line (positive) but starts to fall, the uptrend is weakening. Conversely, when the histogram is below its zero line (negative) and starts to rise, the downtrend is losing momentum. These turns of the histogram provide early warnings that the current trend is losing momentum, and the buy or sell signal is given when the histogram crosses the zero line. Murphy also advocates a two-tiered approach in order to avoid making trades against the major trend. The weekly MACD-H can be used to generate long-term signals. Then only short-term signals that agree with the major trend are used. If the long-term trend is up, only positive divergences with upward zero line crossovers are considered valid for the MACD-H. If the long-term trend is down, only negative divergences with downward zero line crossovers are considered valid. Used this way, the weekly signals become trend filters for daily signals. This prevents using daily signals to trade against the overall trend.

SIGNAL LINE CROSSOVER

GUPTA COLLEGE

[Type the document title]


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. The crossing of the MACD line above the signal line can denote the beginning of a trend. An uptrend typically pauses or stops when the MACD line crosses and falls below 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 is considered more bullish than one below the zero line. The higher above the zero line it crosses, the stronger the uptrend. If the crossover occurs below the zero line, the uptrend is likely not very strong. When the bullish crossover occurs above the zero line, the uptrend gains more momentum, and the price rises with more intensity. Bullish MACD crossovers are probably the most common signals and as such can 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 try and counteract false signals is to apply a price filter to the crossover to see if a trend will hold. An example of a price filter would be to buy if the MACD breaks above the signal line and remains above for three days. The buy signal would then commence at the end of the third day.

2.1Purpose and Objectives of the Study

GUPTA COLLEGE

[Type the document title]


To study the technical analysis forecast applied on stock market by means of a specific indicator.

To provide new evidence by using few NSE listed companies data to investigate whether the Technical indicators do play any useful role in the timing of stock market entry and exit. To study the few technical tools by selecting few companies stocks 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.

GUPTA COLLEGE

[Type the document title]

Unitech

Company Data:
Company Name: Unitech

GUPTA COLLEGE

[Type the document title]


Industry Exchange : : Real Estate NSE

Rule 1: The signals, dates, price and profit (loss) for the 20-days moving Averages shown as follow:

Action Sell Buy Sell Buy Sell

Share price Rs.112 Rs.79 Rs.84 Rs.68 Rs.78

Profit N/A 5 10

Loss N/A 33 16 -

Interpretation: Overall trend was bearish and chart suggested that one can take care of their position. RSI Tools on Unitech

Rule 2: Using the RSI method the following trading activity is shown as

Follows:
GUPTA COLLEGE

[Type the document title]

Action Sell Buy Sell Buy Sell Buy

Share price Rs.112 Rs.98 Rs.109 Rs.72 Rs.83 Rs.66

Profit N/A 11 11 -

Loss N/A 14 37 17

Interpretation: RSI tool suggested that slight bearish trend and one can
wait their Turn 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

GUPTA COLLEGE

[Type the document title]


Follows:

Action Sell Buy Sell Buy Sell Buy

Share price Rs.112 Rs.98 Rs.109 Rs.72 Rs.83 Rs.66

Profit N/A 11 11 -

Loss N/A 14 37 17

Interpretation: MACD chart suggesting overall trend is on bearish side.And


also equating volatility as well. So investors can take care of their positions.

EMA Tool on BHEL

Company Data:
Company Name: BHEL

GUPTA COLLEGE

[Type the document title]


Industry Exchange Action Buy Sell Buy Sell Buy Sell : : Power NSE Share price Rs.2252 Rs.2548 Rs.2103 Rs.2258 Rs.2231 Rs.2408 Profit N/A 290 155 177 Loss N/A 445 27 -

Interpretation: Overall trend of BHEL was quite uptrend and at last it went
sideway and difficult to find out the trend. BHEL was well to make a decent profit. RSI Tool On BHEL

GUPTA COLLEGE

[Type the document title]


Action Buy Sell Buy Sell Buy Sell Share price Rs.2252 Rs.2548 Rs.2103 Rs.2258 Rs.2231 Rs.2408 Profit N/A 290 155 177 Loss N/A 445 27 -

Interpretation: RSI indicates the first few days of BHEL was uptrend and after that it started declining and finally went on side way. And tool says that one can take a fresh position at 30 level.

Action

Share price

Profit

Loss

GUPTA COLLEGE

[Type the document title]


Buy Sell Buy Sell Buy Sell Rs.2252 Rs.2548 Rs.2103 Rs.2258 Rs.2231 Rs.2408 N/A 290 155 177 N/A 445 27 -

Interpretation: Once the faster line crosses the slower line at bottom level than that is the best signal for buying. But here in this graph both faster line and slower lines are moving or overlaps each other. So difficult to find out the trend and as well as price movements.

EMA on ACC

Company Data:
Company Name:
GUPTA COLLEGE

ACC

[Type the document title]


Industry Exchange : : Cement NSE

Rule 1: The signals, dates, price and profit (loss) for the 20-14-5 days moving Averages shown as follow:

Action Sell Buy Sell Buy Sell

Share price Rs.830 Rs.710 Rs.960 Rs.803 Rs.1018

Profit N/A 250 215

Loss N/A 120 157

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

GUPTA COLLEGE

[Type the document title]


Rule 2: Using the MACD method the following trading activity is shown as

Follows:
Action Sell Buy Sell Buy Sell Share price Rs.830 Rs.710 Rs.960 Rs.803 Rs.1018 Profit N/A 250 215 Loss N/A 120 157

Interpretation: This MACD graph says that ACC stock is quite healthy and
having volatility with long term uptrend. When it crosses the zero line the price fluctuations is also good. Overall the trend is healthy to make a profit.

RSI on ACC

GUPTA COLLEGE

[Type the document title]


Rule 3: Using the RSI method the following trading activity is shown as Follows:

Action Sell Buy Sell Buy Sell

Share price Rs.830 Rs.710 Rs.960 Rs.803 Rs.1018

Profit N/A 250 215

Loss N/A 120 157

Interpretation: RSI says that the first few months the stock was performing on sideway and stock went up with short term uptrend and again sideway so the overall Graph having both ups and downs.

Cipla on EMA

GUPTA COLLEGE

[Type the document title]


Company Data: Company Name: Cipla Industry : Pharmaceuticals Exchange : NSE
Rule 1: The signals, dates, price and profit (loss) for the 20-10-5 days moving Averages shown as follow:

Action Buy Sell Buy Sell Buy Sell

Share price Rs.255 Rs.292 Rs.274 Rs.360 Rs.302 Rs.353

Profit N/A 37 86 51

Loss N/A

18 58 -

Interpretation: The 20-10-5 days moving average says that overall trend is on bullish side and also price movement pretty good at upward movement, and also suggested that one can go long with making decent profit in between. Cipla on RSI

GUPTA COLLEGE

[Type the document title]

Rule 2: Using the RSI method the following trading activity is shown as

Follows
Action Buy Sell Buy Sell Buy Sell Share price Rs.255 Rs.292 Rs.274 Rs.360 Rs.302 Rs.353 Profit N/A 37 86 51 18 58 Loss N/A

Interpretation: RSI signals at bottom level i.e., 30 level (buying zone) and also clearly observes that how RSI acts Price acts in a same way. So one can take a fresh New position MACD Cipla

GUPTA COLLEGE

[Type the document title]

Rule 2: Using the MACD method the following trading activity is shown as

Follows
Action Buy Sell Buy Sell Buy Sell Share price Rs.255 Rs.292 Rs.274 Rs.360 Rs.302 Rs.353 Profit N/A 37 86 51 18 58 Loss N/A

Interpretation: Both faster and slower lines are moving togetherly and it says that Investor can unable to identified the trend and price movements as well.

Airtel on EMA

GUPTA COLLEGE

[Type the document title]

Company Name: Bharti Airtel Industry : Telecommunication Exchange : NSE


Rule 1: The signals, dates, price and profit (loss) for the 20-10-5 days moving Averages shown as follow

Action Sell Buy Sell Buy Sell

Share price Rs.487 Rs.270 Rs.338 Rs.320 Rs.331

Profit N/A 88 11

Loss N/A 217 18 -

Interpretation: EMA suggests that there is a big downtrend happened and stock went up sideway so that one can wait before going for fresh position.

GUPTA COLLEGE

[Type the document title]


Airtel on RSI

Rule 2: Using the RSI method the following trading activity is shown as

Follows
Action Sell Buy Sell Buy Sell Share price Rs.487 Rs.270 Rs.338 Rs.320 Rs.331 Profit N/A 88 11 Loss N/A 217 18 -

Interpretation: RSI signals that overall sideway trend is there. And also consolidation taking place and one can unable to identify the trend and behavior of the stock as well.so wait for clear signals.

GUPTA COLLEGE

[Type the document title]


Airtel on MACD

Rule 2: Using the MACD method the following trading activity is shown as

Follows
Action Sell Buy Sell Buy Sell Share price Rs.487 Rs.270 Rs.338 Rs.320 Rs.331 Profit N/A 88 11 Loss N/A 217 18 -

Interpretation: Big downfall has happened in the beginning and later faster and slower lines are converged and no price upward and downward movements.so one Wait for their fresh position before going long.

GUPTA COLLEGE

[Type the document title]


EMA Tata Motors

Company Name : Tata motors Industry : Automobile Exchange : NSE


Rule 1: The signals, dates, price and profit (loss) for the 20-10-5 days moving Averages shown as follow Action Share price Profit Loss

Buy Sell Buy Sell Buy Sell

Rs.570 Rs.715 Rs.690 Rs.840 Rs.700 Rs 840

N/A 145 140 140

N/A 25 140 -

Interpretation : 20 days EMA says that there is an big uptrend with long term nature and one can go long by doing decent profit in between as well.

GUPTA COLLEGE

[Type the document title]


RSI Tata Motors

Rule 2: Using the RSI method the following trading activity is shown as

Follows
Action Buy Sell Buy Sell Buy Sell Share price Rs.570 Rs.715 Rs.690 Rs.840 Rs.700 Rs 840 Profit N/A 145 140 140 Loss N/A 25 140 -

Interpretation: RSI is moving sideway but chart is on uptrend this is a weak stock because both RI and Chart are moving against in direction and one can take care of their position.

GUPTA COLLEGE

[Type the document title]


TATA MOTORS ON MACD

Rule 2: Using the MACD method the following trading activity is shown as

Follows
Action Buy Sell Buy Sell Buy Sell Share price Rs.570 Rs.715 Rs.690 Rs.840 Rs.700 Rs 840 Profit N/A 145 140 140 Loss N/A 25 140 -

Interpretation: An overbought situation exists when the lines are too far above the zero line and over sold situation when the lines are too far below the zero line. But in this case two things are not happening but chart is quite uptrend so one can take care of their position.

GUPTA COLLEGE

[Type the document title]


TCS on EMA

Company Name : Tata consultancy service Industry : Software Exchange : NSE


Rule 1: The signals, dates, price and profit (loss) for the 20 days moving Averages shown as follow

Action Buy Sell Buy Sell Buy Sell

Share price Rs.628 Rs.736 Rs.694 Rs.810 Rs.700 Rs 840

Profit N/A 108 116 140

Loss N/A 58 140 -

Interpretation: The overall trend is quite upward movement and also chart suggests one can go long by making decent profit.

GUPTA COLLEGE

[Type the document title]

TCS on MACD

Rule 2: Using the MACD method the following trading activity is shown as

Follows
Action Buy Sell Buy Sell Buy Sell Share price Rs.570 Rs.715 Rs.690 Rs.840 Rs.700 Rs 840 Profit N/A 145 140 140 Loss N/A 25 140 -

Interpretation: Both faster and slower lines are above the zero line and it indicates that is an overbought situation and also one can take care of their positin before moving long

GUPTA COLLEGE

[Type the document title]

TCS on RSI

Rule 2: Using the RSI method the following trading activity is shown as

Follows
Action Buy Sell Buy Sell Buy Sell Share price Rs.570 Rs.715 Rs.690 Rs.840 Rs.700 Rs 840 Profit N/A 145 140 140 Loss N/A 25 140 -

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 always follow the RSI not a Price.

GUPTA COLLEGE

[Type the document title]

Summary
In this study, I have made 21 predictions in six months. All tools are tested for the NSE stocks 2009-2010. The price movement plotted on the graph for calculated data made the predictions. Relevance of the share price are tested by comparing the actual price and signals of the graphs. Totally 15 predictions of the graphs were able to make right decision and helped to investors to profitable trade. 6 predictions of the graphs 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 the stock. The day moving average prediction in the year 2009-2010 is more efficient compare to other tools. 9 out of 12 time the day moving average has given right prediction. The traders who invested in the share according to the day moving average 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

GUPTA COLLEGE

[Type the document title]


used in this study are Relative strength index and MACD methods. Both were given only 5 times right prediction. The investors who made their investment according to these predictions have occurred 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 graph and more reliable to the regular traders. Which technical analysis tool we use will depend on your trading and investing style and preferences. The day moving average obviously has a lag, but the other tools which are used here also be prone to quicker breaks. Some traders prefer to use Relative Strength Index for shorter time periods to capture changes quicker. Some investors prefer simple moving averages over long time periods to identify long-term trend 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 individual security and how it has reacted in the past. The initial thought for some is that greater sensitivity and quicker signals are bound to be beneficial. This is not always true and brings up a great dilemma for the technical analyst: the trade off between sensitivity and reliability. The more sensitive an 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 sensitive an indicator is, the fewer signals that will be given. However, less sensitivity leads to fewer 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 trend and its momentum as well.

Relative strength index gives clear signal of the stock in order to take a fresh position by identifying the buying and selling signals and through out the study it proved its accuracy. MACD has been proved not reliable from this study.

GUPTA COLLEGE

[Type the document title]


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 will move hand in hand. Technical analysis is all about study of charts, through this charts one can find out the trend and price movements. Technical analysis is a quick study and it is not a time consuming as like fundamental 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 the tools which are using and then apply which makes sense. Tools like RSI, MACD, EMA are really performing well through out the study 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.

GUPTA COLLEGE

[Type the document title]


Focus on your potential risk and identifying your exit plan and it is easy to keep emotions out of the game allowing you to think clearly and stick to your trading Plan. You need to have a proven and consistent strategy that will allow you to find winning stocks in any market environment. Technical analysis is all about research study and one can study in detail about each technical tool which can help the investors to indentify behavior of the Stock easily. Make an investment plan and select the few liquid stocks which, is helpful to make a decent sound profit. Make your own analysis by using technical tools instead of hearing false rumors. Investors always keep in mind that follows the trend which you are identified through tools and never follow the price.

Conclusions
In general, we can conclude from the results that the technical indicators can play a useful role in the timing of stock market entry and exits. By applying technical indicators, brokers or investors may enjoy substantial profits. The moving average Convergence and Divergence policy gives greater total profit than the buy and hold Strategy. This study offers predictive ability of technical trading rules without trading costs environment in the market. The use of historical price information together with the current prices allows extra returns to be generated.

GUPTA COLLEGE

[Type the document title]


The findings confirm the predictive ability of moving averages and Convergence and the Relative Strength Index with out taking cost of trading in to account. Most survey studies indicate that technical analysis has been widely used by market participants in futures markets and foreign exchange markets, and that at least 30% 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 testing technical trading strategies, skepticism about technical trading profits remains widespread among academics. Technical analysis may be partially self-fulfilling and thus its employment is likely to further increase its popularity. Thus it was suggested that the usage of technical analysis would be likely to increase volatility in stock markets. This may show that there are potential negative impacts 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

GUPTA COLLEGE

[Type the document title]


Fischer and Jordan. Security analysis and Portfolio management sixth edition 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 Papers on Economic Activity, 2, Brookings Institution, Sy W., 1990, Market Timing: Is It a Folly? Journal of Portfolio Management 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

GUPTA COLLEGE