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Part 23: Technical Analysis – Basic indicators (MA+BB)
The majority of retail traders rely purely on the technical analysis. No wonder, technical analysis is a relatively simple tool bringing good results. At various websites, you can find plenty of guides helping traders in using this tool. Our website itself contains (in our series on technical analysis) more than 20 articles about chart analyzing.
What are the most popular indicators of technical analyzing and how to use them in trading strategies? Read more.
Moving average (MA)
A simple moving average is clearly defined by its name. It is the average price of a security over a specific period. Each trader may choose a period – the same as the price – from which the moving average should be calculated. Usually, traders choose between the opening and closing prices. However, you can also choose the median, average or high/low.
When trading, next to SMA (simple moving average) you may come across EMA (exponential moving average). It’s similar to SMA except that more weight is given to the latest data. This means that the price of yesterday is more important than the price one week ago. EMA is also known as an exponentially weighted average.
How to make use of moving average?
The first option does not give you a signal to open a trade but it’s equally as important. A long-term MA (with high periodicity) indicates a trend. The trend may also indicate a trend line. Moving average can prove its quality in many situations. Remember: Most of the time markets move sideways. To recognize a trend may not be as easy as it appears to be at first sight.
With moving average, you can quickly predict a trend in the market, downwards or upwards. Obviously, nothing is either white or black, but as a tool for making a basic analysis this indicator id fairly sufficient.
You surely are more curious about trading strategies, aren’t you? Well, the simplest one uses the crossing of moving average and price. The situation may look like this:
Price crossing the MA line -> signal to buy or sell
Another option is the crossing of moving average, sometimes referred to as Death cross. Most frequent combinations are the following ones: 20-day and 50-day, 20-day and 100-day or, 20-day and 200-day. Moving average with a lower period is always more volatile and as such more quickly reflects the latest prices. The crossing of a long-term moving average top-down indicates a signal to sell, the opposite means a signal to buy.
A crossing of MA (moving average) -> signal to buy or sell
Another indicator popular among traders, especially the beginners, is Bollinger bands. This tool was invented by John Bollinger in the 1980s. As a technical indicator, Bollinger bands help visualize volatility and relative price levels over a particular period of time. The bigger the volatility, the broader the Bollinger band.
Bollinger bands are mostly based on a 20-day moving average (open to changes) and a standard deviation. The upper and lower bands usually make up the double of a standard deviation. Bollinger points to an area where the market should move and once this area is broken the situation is regarded as non-standard, which might be used as a trading signal (even though Bollinger himself does not specifically recommend this method).
Bollinger bands: the price moved out of the band
What are Bollinger bands good for? If a band is broken this is a warning or confirming signal of a different pattern. Bollinger bands can be combined with other technical analysis tools to help you as the main or confirming signal.
TIP: We recommended the use of Bollinger bands in a simple strategy for trading fundaments. For more details, read here.
Technical analysis as such is a far broader topic. What we never recommend is draw trend lines or use indicators such as RSI or MACD. Be careful not to over-combine the indicators. Use three to four indicators at a time, not more.
Anyway, we will revisit the topic (i.e. basic indicators of technical analysis) in our next articles.
Next Parts of Technical Analysis Show
More about the author J. Pro
Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author
Technical Analysis Show
Technical analysis is one of the two main types of an analysis. Using technical analysis, the traders assume that with the help of specific formulas, indicators and various techniques of reading charts, their chances to predict future trends will increase.
Technical analysis is used by the vast majority of binary options traders. The technical analysis category covers all kinds of trading strategies based on price movements, volumes, trends and indicators.
On this page, you will see a set of articles on the technical analysis for assets such as currencies, commodities, indexes and shares. We strongly recommend you learn the basics of technical analysis. This is the only way for a new trader to become a profitable trader.
Technical analysis can help you not only in binary options trading, but also in the trading of Forex and CDF.
There is basically one major difference between binary options and CDF (Forex) trading. Whereas with binary options you are dependent on a preset timeframe, with Forex you can hold
A chart showing how traders using technical analysis might open a trade
your position as long as you wish. This gives you a certain advantage as you can wait until the best time to close your position.
No matter what assets you prefer, I recommend you learn the technical analysis and use in your trading.
Good luck when analysing the charts!
Articles about Technical Analysis Show
Part 25: Technical Analysis – The 1-2-3 pattern
The 1-2-3 pattern is one of the traditional patterns popularised by Victor Sperandeo and Joe Rosse. Even if you already have your trading strategy or, are more or less a…
Part 24: Technical Analysis – Fibonacci Sequence
Fibonacci sequence is a well-known term not only among technical analysis traders. What about you? Did you know this term? Let’s take a short look at the technical aspects of…
Part 23: Technical Analysis – Basic indicators (MA+BB)
The majority of retail traders rely purely on the technical analysis. No wonder, technical analysis is a relatively simple tool bringing good results. At various websites, you can find plenty…
Technical analysis and cryptocurrencies: Does it make sense?
Technical analysis is the most widespread tool used by traders to predict future market developments. It is relatively simple and if used correctly, fairly efficient. The question is: Does it…
Part 22: Technical Analysis – Flags and triangles
You don’t have to be a technical trader but what you must know are some basic patterns of a technical analysis. A flag and a triangle surely rank among such…
Part 21: Technical Analysis – Trading by VIX
VIX, a volatility index sometimes referred to as investor fear gauge, is a tool that shows market sentiment. Use another view and anticipate the behavior of most traders. First of…
Part 20: Technical Analysis – Market profile and market volume
The market has bounced off a level you’ve never predicted and you don’t know how it is possible. Market volume or market profile may explain it. However, be careful; they…
Part 19: Technical Analysis – Consolidation and Divergences
Because our technical analysis show here at the website has become very popular, today we are continuing with our 19th article. In this part, we will explore two basic elements…
Part 18: Technical Analysis – Using Fibonacci lines (video)
Today, we will focus on the application of Fibonacci lines in more detail. As we have already spent some time on this topic, to get a better grasp of the…
Technical or fundamental analysis: Which one should you choose?
There are loads of strategies for the trading binary options, forex or cryptocurrencies that can be grouped into two categories: fundamental a technical. Which of them is more efficient? Is…
The practical implication of Technical analysis with Bollinger Bands on empirical study on Dhaka Stock Exchange (DSE)
Published on Apr 17, 2020
Any trader or investor gets benefits to analyze the market by using the method of technical analysis. Bollinger Bands is one of the most important indicators of technical analysis. In this study I have discussed easily about technical analysis, various types of indicators especially Bollinger Bands with example so that any new or old trader or investor can get understand about these fact. Then I have focus on practical implications where I have implemented Bollinger Bands as indicator to analyze ten listed companies of DSE. These ten companies are- LankaBangla Finance Ltd., Meghna Petroleum Ltd., United Airways (BD) Ltd., Jamuna Oil Company Ltd., Padma Oil Company Ltd., Active Fine Chemicals Ltd, Bangladesh Submarine Cable Company Ltd., Islami Bank Bangladesh Ltd., Square Pharmaceutical Ltd., & Titas Gas Transmission & Dist. Co. Ltd.
I have also presented a regression analysis for each company. The regressions are done by two variables which are closing price of each company as dependent variable & Index of DSE as independent variable. These regression analyses are done to find dependence of company’s closing price on Index of DSE. Finally, I have presented the Bollinger Bands charts of Index of DSE to highlight the market condition of DSE.
At last I expect this study will be a conducive for any new or old trader or investor to analyze their markets.
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- 1. Research Paper On The practical implication of Technical analysis with Bollinger Bands on empirical study on Dhaka Stock Exchange (DSE)
- 2. A Report on The practical implication of Technical analysis with Bollinger Bands on empirical study on Dhaka Stock Exchange (DSE) Prepared For Chairman Department of Finance & Banking Faculty of Business Studies Prepared By Khairuzzaman Mamun Student ID: 20203137 EMBA Program, Major in Finance & Banking Faculty of Business Administration Jahangirnagar University Savar, Dhaka-1342 Date of Submission: 24th August, 2020
- 3. 24th August, 2020 The Chairman Department of Finance & Banking Faculty of Business Studies Jahangirnagar University Savar, Dkaka-1342 Through: Mohammed Sawkat Hossain, Thesis Supervisor Subject: Submission of the Master Thesis on “The practical implication of Technical analysis with Bollinger Bands on empirical study on Dhaka Stock Exchange (DSE)” Dear Sir, It is my pleasure to submit the paper on “The practical implication of Technical analysis with Bollinger Bands on empirical study on Dhaka Stock Exchange (DSE)”. The paper is submitted as part of the partial fulfillment of the MBA program. The main purpose of this study is to verify the feasibility of Technical Analysis by Bollinger Bands on Dhaka Stock Exchange (DSE). The research paper is analyzed by the secondary data of the companies which are listed in the Dhaka Stock Exchange (DSE). In technical methods Bollinger Bands & % b indicators are used in the research paper. I am grateful to you for providing me the opportunity to have such an excellent experience. Sincerely, Khairuzzaman Mamun ID: 20203137 EMBA Program, Major in Finance & Banking i
- 4. Acknowledgement From the core of my heart I would like to convey my earnest admiration, loyalty and reverence to the almighty Allah, the most merciful, for keeping everything in order and enabling me to complete this thesis successfully. First let me express my thanks to my research supervisor Md.Sawkat Hossain, Department of Finance & Banking, Jahangirnagar University. He gives me my first introduction to the world about Technical analysis. It would be impossible for me to finish this research without his direction and encouragement. It has been a pleasure to have worked with him. His support, supervision and assistance will always be greatly appreciated. I would like to especially thank Md. Tarikul Islam, Chairman, Department of Finance & Banking, Jahangirnagar University; Without his kind guidance, this thesis would have been impossible. I am grateful to the Dean of the Faculty of Business Studies, Jahangirnagar University, for allowing me to work on “The practical implication of Technical analysis with Bollinger Bands on empirical study on Dhaka Stock Exchange (DSE)”. I also express my profound gratitude to all other teachers for their kind help and valuable suggestion. I also thank Jahangirnagar University and generally thank to the office staff for their collaboration. I am thankful and grateful to all the employees of Securities and Exchange Commission (SEC) and Dhaka Stock Exchange (DSE) for their help. I also recall, with gratitude, the patience they showed during my frequent interruptions in their regular jobs for answering my various queries. Finally, I stretch out my heartiest love to my beloved mother, father, sister and brother during the progress of the thesis paper for their direct and indirect co-operation without which this study would be impossible. Sincerely, Khairuzzaman Mamun ID: 20203137 EMBA Program, Major in Finance & Banking ii
- 5. Abstract Any trader or investor gets benefits to analyze the market by using the method of technical analysis. Bollinger Bands is one of the most important indicators of technical analysis. In this study I have discussed easily about technical analysis, various types of indicators especially Bollinger Bands with example so that any new or old trader or investor can get understand about these fact. Then I have focus on practical implications where I have implemented Bollinger Bands as indicator to analyze ten listed companies of DSE. These ten companies are- LankaBangla Finance Ltd., Meghna Petroleum Ltd., United Airways (BD) Ltd., Jamuna Oil Company Ltd., Padma Oil Company Ltd., Active Fine Chemicals Ltd, Bangladesh Submarine Cable Company Ltd., Islami Bank Bangladesh Ltd., Square Pharmaceutical Ltd., & Titas Gas Transmission & Dist. Co. Ltd. I have also presented a regression analysis for each company. The regressions are done by two variables which are closing price of each company as dependent variable & Index of DSE as independent variable. These regression analyses are done to find dependence of company’s closing price on Index of DSE. Finally, I have presented the Bollinger Bands charts of Index of DSE to highlight the market condition of DSE. At last I expect this study will be a conducive for any new or old trader or investor to analyze their markets. iii
- 6. Table of Contents Chapter Title Page Letter of Transmital i Acknowledgement ii Abstract iii Table of Contents iv List of Tables v List of charts vi 1 Introduction 01-03 Background 01 Problem Statement 02 Objectives 02 Methodology 02 Limitations 03 Report Layout 03 2 Technical Analysis 04-08 Introduction 04 Principles of Technical Analysis 05 Types of Share Price Movement 05 Types of overall trend under primary movements 05 Indicators of technical analysis 05 Types of indicators 06 Conclusion about Technical Analysis 08 3 Bollinger Bands 09-15 Introduction 09 Bollinger Bands consist of 09 Sharp charts calculation 09 The determinative parameter for BB 10 Estimation of market volatility 11 Classic bounce from Bollinger Bands lines 12 Bollinger Bands squeeze 13 Bandwidth & %b 14 Some additional advice 15 Conclusions about Bollinger Bands 15 4 Implementation & Analysis 16-47 Introduction 16 LankaBangla Finance Ltd. 17 Meghna Petroleum Ltd 20 United Airways (BD) Ltd 23 Jamun Oil Company Ltd 26 Padma Oil Company Ltd 29 Active Fine Chemicals Ltd 32 Bangladesh Submarine Cable Company Ltd 35 Islami Bank Bangladesh Ltd 38 Square Pharmaceuticals Ltd 41 Titas Gas Transmission & Dist. Co. Ltd 44 Dhaka Stock Exchange (DSE) 47 5 Findings & conclusions 50-51 6 References 52 iv
- 7. List of Tables Table Title Page Table#1 Bollinger Bands (20, 2); LankaBangla Finance Ltd 17 Table#2 Model summery, ANOVA, Coefficients; LankaBangla Finance Ltd. 19 Table#3 Bollinger Bands (20, 2); Meghna Petroleum Ltd. 20 Table#4 Model summery, ANOVA, Coefficients; Meghna Petroleum Ltd. 22 Table#5 Bollinger Bands (20,2); United Airways (BD) Ltd. 23 Table#6 Model summery, ANOVA, Coefficients; United Airways (BD) Ltd. 25 Table#7 Bollinger Bands (20,2); Jamun Oil Company Ltd. 26 Table#8 Model summery, ANOVA, Coefficients; Jamun Oil Company Ltd. 28 Table#9 Bollinger Bands (20, 2); Padma Oil Company Ltd. 29 Table#10 Model summery, ANOVA, Coefficients; Padma Oil Company Ltd. 31 Table#11 Bollinger Bands (20,2); Active Fine Chemicals Ltd. 32 Table#12 Model summery, ANOVA, Coefficients; Active Fine Chemicals Ltd. 34 Table#13 Bollinger Bands (20,2); Bangladesh Submarine Cable Company Ltd. 35 Table#14 Model summery, ANOVA, Coefficients; Bangladesh Submarine Cable Co. Ltd. 37 Table#15 Bollinger Bands (20, 2); Islami Bank Bangladesh Ltd. 38 Table#16 Model summery, ANOVA, Coefficients; Islami Bank Bangladesh Ltd. 40 Table#17 Bollinger Bands (20, 2); Square Pharmaceuticals Ltd. 41 Table#18 Model summery, ANOVA, Coefficients; Square Pharmaceuticals Ltd. 43 Table#19 Bollinger Bands (20,2); Titas Gas Transmission & Dist. Co. Ltd. 44 Table#20 Model summery, ANOVA, Coefficients; Titas Gas Transmission & Dist. Co. Ltd. 46 Table#21 Bollinger Bands (20,2); Dhaka Stock Exchange (DSE) 47 v
- 8. List of Charts Chart Title Page Chart # i Closing Price Daily, 20-period/2-deviations Bollinger Bands; Example 10 Chart # ii Closing Price Daily, 20-period/2-deviations Bollinger Bands; Example 11 Chart # iii Closing Price Daily, 20-period/3-deviations Bollinger Bands; Example 12 Chart # iv Closing Price Daily, 20-period/2-deviations Bollinger Bands; Example 12 Chart # v Closing Price Daily, 20-period/2-deviations Bollinger Bands; Example 13 Chart # vi Closing Price Daily, 20-period/2-deviations Bollinger Bands; Example 14 Chart #1 Closing Price Daily, 20-period/2-deviations Bollinger Bands; LankaBangla Finance Ltd 18 Chart #2 Daily Deviation of closing prices; LankaBangla Finance Ltd 18 Chart #3 Daily %b of Bollinger Bands; LankaBangla Finance Ltd 19 Chart #4 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Meghna Petroleum Ltd. 21 Chart #5 Daily Deviation of closing prices; Meghna Petroleum Ltd 21 Chart #6 Daily %b of Bollinger Bands; Meghna Petroleum Ltd 22 Chart #7 Closing Price Daily, 20-period/2-deviations Bollinger Bands; United Airways (BD) Ltd 24 Chart #8 Daily Deviation of closing prices; United Airways (BD) Ltd 24 Chart #9 Daily %b of Bollinger Bands; United Airways (BD) Ltd 25 Chart #10 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Jamun Oil Company Ltd 27 Chart #11 Daily Deviation of closing prices; Jamun Oil Company Ltd 27 Chart #12 Daily %b of Bollinger Bands; Jamun Oil Company Ltd 28 Chart #13 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Padma Oil Company Ltd 30 Chart #14 Daily Deviation of closing prices; Padma Oil Company Ltd 30 Chart #15 Daily %b of Bollinger Bands; Padma Oil Company Ltd 31 Chart #16 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Active Fine Chemicals Ltd 33 Chart #17 Daily Deviation of closing prices; Active Fine Chemicals Ltd 33 Chart #18 Daily %b of Bollinger Bands; Active Fine Chemicals Ltd 34 Chart #19 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Bangladesh Submarine Cable Company Ltd 36 Chart #20 Daily Deviation of closing prices; Bangladesh Submarine Cable Company Ltd 36 Chart #21 Daily %b of Bollinger Bands; Bangladesh Submarine Cable Company Ltd 37 Chart #22 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Islami Bank Bangladesh Ltd 39 Chart #23 Daily Deviation of closing prices; Islami Bank Bangladesh Ltd 39 Chart #24 Daily %b of Bollinger Bands; Islami Bank Bangladesh Ltd 40 Chart #25 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Square Pharmaceuticals Ltd 42 Chart #26 Daily Deviation of closing prices; Square Pharmaceuticals Ltd 42 Chart #27 Daily %b of Bollinger Bands; Square Pharmaceuticals Ltd 43 Chart #28 Closing Price Daily, 20-period/2-deviations Bollinger Bands; Titas Gas Transmission & Dist. Co. Ltd 45 Chart #29 Daily Deviation of closing prices; Titas Gas Transmission & Dist. Co. Ltd 45 Chart #30 Daily %b of Bollinger Bands; Titas Gas Transmission & Dist. Co. Ltd 46 Chart #31 Index of DSE, Daily, 20-period/2-deviations Bollinger Bands; Dhaka Stock Exchange (DSE) 48 Chart #32 Daily Deviation of Index of DSE; Dhaka Stock Exchange (DSE) 48 Chart #33 Daily %b of Bollinger Bands; Dhaka Stock Exchange (DSE) 49 vi
- 9. 1 | P a g e Chapter 1 Introduction Background: The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn’t care one bit about the “value” of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. Technical analysis and fundamental analysis are the two main schools of thought in the financial markets. Difference are- 1. A technical analyst approaches a security from the charts, while a fundamental analyst starts with the financial statements. Fundamental analysis takes a relatively long-term approach to analyzing the market compared to technical analysis. While technical analysis can be used on a timeframe of weeks, days or even minutes, fundamental analysis often looks at data over a number of years. 2. Not only is technical analysis more short term in nature than fundamental analysis, but the goals of a purchase (or sale) of a stock are usually different for each approach. In general, technical analysis is used for a trade, whereas fundamental analysis is used to make an investment. Investors buy assets they believe can increase in value, while traders buy assets they believe they can sell to somebody else at a greater price. The line between a trade and an investment can be blurry, but it does characterize a difference between the two schools. 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’s on your side can provide the best-case scenario for a trade.
- 10. 2 | P a g e Problem Statement: Although Fundamental analysis is important in analyzing any security, I focus on technical analysis in share price movement of any security. There are many indicators for analyzing the share price movement of any security. Among them Bollinger Bands is another important indicator for analyzing any security. In this study I use Bollinger Bands as indicator to analyze some randomly selected securities of DSE. The main purpose of this study is to verify the feasibility of Technical Analysis by Bollinger Bands on Dhaka Stock Exchange (DSE) and to analyze securities price movement by using Bollinger Bands of Technical analysis. Objectives: 1. To verify the feasibility of Technical Analysis on Dhaka Stock Exchange (DSE) 2. To analyze securities price movement by using Bollinger Bands of Technical analysis. 3. To calculate moving average of price, deviation of price, upper band, & lower band. 4. To show their graphical representation. 5. To identify the upward and downward price movements of selected securities. 6. To calculate the value of %b & to show its graphical representation. 7. To forecast future price range & trend of each security. Methodology: Research Design Now a day’s DSE is very frequent fluctuate market. Here all the data are historical. For this the given assumptions are built in the base of the historical data. All showed graphs are help to recognize the recent market. This study is very much authentic and realistic. For this any new investor or the old investor can take decision from it. So the research is design in the base of historical data and show the situation of the market. More over the market is now very unpredictable, so the analysis report is very much important for all. The study involved a secondary data about DSE, Dhaka, Bangladesh. Also the companies own website is also helpful for the research. Sources of Data: The data has been collected from Secondary sources. Secondary data sources: Secondary data, such as several academic articles and books have been analyzed to form and clarify the topic of the research, and thus to identify the key variables related to the response and attribution of the entrepreneur in the incidents of the Technical Analysis collecting from DSE and company information. The secondary data sources were- websites, books etc.
- 11. 3 | P a g e Data collection procedure: The data was collected from the secondary market of DSE. Method of Analysis: For implementation & analysis I have taken closing prices of ten listed company then I have done some calculation with excel to find the moving average, deviation, upper band & lower band. Using these data I have found three charts for each company such as- 1. Closing Price Daily, 20-period/2-deviations Bollinger Bands 2. Daily Deviation of closing prices 3. Daily %b of Bollinger Bands I have also presented a regression analysis for each company. The regressions are done by two variables which are closing price of each company as dependent variable & Index of DSE as independent variable. These regression analyses are done to find dependence of company’s closing price on Index of DSE. Finally I have presented the Bollinger Bands charts of Index of DSE to highlight the market condition of DSE. Limitations: I have taken daily closing price. If I would take longer period, results, interpretation & analysis may defer. I have used Bollinger Bands as indicator. If I would take another indicator, then interpretation & analysis may defer. Interpretation depends upon perception of chartists based on charts without considering other socio economical influencing factors. The technical analysis failed to signal an uptrend or downtrend in time. Report Layout: Chapter 1 gives background, methodology, objective and limitations of the report. Chapter 2 describes the Technical Analysis. Chapter 3 describes the Bollinger Bands Chapter 4 gives Implementation & Analysis Chapter 5 highlights findings & conclusions Chapter 6 gives reference
- 12. 4 | P a g e Chapter 2 Technical Analysis Introduction: Technical Analysis is the forecasting of future financial price movements based on an examination of past price movements. Like weather forecasting, technical analysis does not result in absolute predictions about the future. Instead, technical analysis can help investors anticipate what is “likely” to happen to prices over time. Technical analysis is a method of evaluating securities by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity. Just as there are many investment styles on the fundamental side, there are also many different types of technical traders. Some rely on chart patterns; others use technical indicators and oscillators, and most use some combination of the two. In any case, technical analysts’ exclusive use of historical price and volume data is what separates them from their fundamental counterparts. Unlike fundamental analysts, technical analysts don’t care whether a stock is undervalued – the only thing that matters is a security’s past trading data and what information this data can provide about where the security might move in the future. The field of technical analysis is based on three assumptions: 1. The Market Discounts Everything: A major criticism of technical analysis is that it only considers price movement, ignoring the fundamental factors of the company. However, technical analysis assumes that, at any given time, a stock’s price reflects everything that has or could affect the company – including fundamental factors. Technical analysts believe that the company’s fundamentals, along with broader economic factors and market psychology, are all priced into the stock, removing the need to actually consider these factors separately. This only leaves the analysis of price movement, which technical theory views as a product of the supply and demand for a particular stock in the market. 2. Price Moves in Trends: In technical analysis, price movements are believed to follow trends. This means that after a trend has been established, the future price movement is more likely to be in the same direction as the trend than to be against it. Most technical trading strategies are based on this assumption. 3. History Tends To Repeat Itself: Another important idea in technical analysis is that history tends to repeat itself, mainly in terms of price movement. The repetitive nature of price movements is attributed to market psychology; in other words, market participants tend to provide a consistent reaction to similar market stimuli over time. Technical
- 13. 5 | P a g e analysis uses chart patterns to analyze market movements and understand trends. Although many of these charts have been used for more than 100 years, they are still believed to be relevant because they illustrate patterns in price movements that often repeat themselves. Technical analysis is applicable to stocks, indices, commodities, futures or any tradable instrument where the price is influenced by the forces of supply and demand. Principles of Technical Analysis: 1. Demand and supply factors 2. Rational and irrational factors 3. Continuous in particular direction 4. Shift of Demand and supply factors 5. Charts representing market action 6. Patterns to forecast forwarded share price Types of Share Price Movement: 1. Tertiary Movement – [Day to day movement] 2. Secondary Movement – [A number of weeks or month] 3. Primary Movement – [Period of several months or years] Types of overall trend under primary movements: There are two types of overall trend under primary movements 1. Bullish Trend 2. Bearish Trend Bullish Trend: Three phases of a bullish market – revival of confidence, improvement of corporate earnings, speculation & inflation. Bearish Trend: Three phases of a bearish market-abandonment of hopes, low profits and dividends, further distress selling. Indicators of technical analysis: 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: 1. to confirm price movement and the quality of chart patterns, and 2. To form buy and sell signals.
- 14. 6 | P a g e Types of indicators: There are many types of indicators as follows: Trend Indicators: Trend indicators reflect three tendencies in price movements: Up moves, down moves and sideways price moves. These indicators help define prevailing directions/ trends of the price moves by smoothing price data over a certain period of time. In simple words, Trend indicators allow us to visualize Trends in the market. 1. Ichimoku Kinko Hyo 2. Advance Decline Line (ADL) 3. Average Directional Index (ADX) 4. Average Directional Movement Index Rating (ADXR) 5. Commodity Selection Index (CSI) 6. Directional Movement Index (DMI) 7. Double Exponential Moving Average (DEMA) 8. Heiken Ashi 9. Moving Average Convergence and Divergence (MACD) 10. Moving Averages: EMA, SMA and WMA 11. Parabolic SAR 12. Percentage Price Oscillator (PPO) 13. Point & Figure 14. Triple Exponential Moving Average (TEMA) 15. Triple Exponential Moving Average (TRIX) Momentum Indicators: Momentum indicators show the strength of trends by recording the speed of prices moving over certain time period. At the same time, Momentum indicators track strength and weakness of a trend as it progresses over a given period of time: the highest momentum is always registered at the beginning of a trend, the lowest – at its end point. 1. Accumulative Swing Index (ASI) 2. Advance Decline Ratio (ADR) 3. Aroon Indicator 4. Aroon Oscillator 5. Chande Momentum Oscillator 6. Commodity Channel Index (CCI) 7. Intraday Momentum Index 8. Centre of Gravity 9. Linear Regression Slope 10. Mass Index 11. Momentum Indicator 12. Price Oscillator 13. Qstick 14. Random Walk Index 15. Rate of Change (ROC) 16. Relative Momentum Index (RMI)
- 15. 7 | P a g e 17. Relative Strength Index (RSI) 18. Smoothed Indexed Rate of Change (SIROC) 19. Stochastics 20. Stochastic RSI 21. Stochastic Momentum Index 22. Ultimate Oscillator 23. Williams %R 24. Williams’ Accumulation-Distribution Volatility Indicators: Volatility indicators show the size and the magnitude of price fluctuations. In any market there are periods of high volatility (high intensity) and low volatility (low intensity). These periods come in waves: low volatility is replaced by increasing volatility, while after a period of high volatility there comes a period of low volatility and so on. Volatility indicators measure the intensity of price fluctuations, providing an insight into the market activity level. 1. Average True Range (ATR) 2. Bollinger Bands (BB) 3. Chaikin Volatility (CHV) 4. Donchian Channel 5. Keltner Bands 6. McGinley Dynamic indicator (MDI) 7. Moving Average Envelopes 8. Starc Bands Volume Indicators: Volume indicators are used to determine investors’ interest in the market. High volume, especially near important market levels, suggests a possible start of a new trend, while low volume suggests trader’s uncertainty and/or no interest in a particular market. 1. Acceleration Bands 2. Market Facilitation Index 3. Chaikin Money Flow (CMF) 4. Chaikin Oscillator 5. Accumulation Distribution Oscillator (ADO) 6. Volume Oscillator (PVO) 7. Demand Index 8. On Balance Volume (OBV) 9. Money Flow
- 16. 8 | P a g e Cycle Indicators: A cycle in the market is determined by a series of repeating patterns. These patterns are, as a rule, dedicated to certain market events, such as seasons, simple day counts, event-to-event sequence, market theories and formulas and so on. 1. Detrended Price Oscillator (DPO) 2. Elliott waves 3. Schaff Trend Cycle 4. Fibonacci 5. Fourier Transform Conclusions about Technical analysis: Technical analysts consider the market to be 80% psychological and 20% logical. Fundamental analysts consider the market to be 20% psychological and 80% logical. Psychological or logical may be open for debate, but there is no questioning the current price of a security. Technical analysis focuses directly on the bottom line: What is the price? Where has it been? Where is it going? In this study I use Bollinger Bands as indicator to analyze some our randomly selected securities of DSE, so I am presenting a brief about this indicator in the next chapter.
- 17. 9 | P a g e Chapter 3 Bollinger Bands Introduction: Bollinger Bands is a technical analysis tool invented by John Bollinger in the 1980s, and a term trademarked by him in 2020. Having evolved from the concept of trading bands, Bollinger Bands and the related indicators %b and bandwidth can be used to measure the “highness” or “lowness” of the price relative to previous trades. Bollinger Bands are a volatility indicator similar to the Keltner channel. Bollinger Bands is a versatile tool combining moving averages and standard deviations and is one of the most popular technical analysis tools available for traders. Bollinger Bands consist of: Bollinger Bands consist of a middle band with two outer bands. The middle band is a simple moving average that is usually set at 20 periods. A simple moving average is used because the standard deviation formula also uses a simple moving average. The look-back period for the standard deviation is the same as for the simple moving average. The outer bands are usually set 2 standard deviations above and below the middle band. These are listed below- 1. an N-period moving average (MA) 2. an upper band at K times an N-period standard deviation above the moving average (MA + Kσ) 3. a lower band at K times an N-period standard deviation below the moving average (MA − Kσ) Typical values for N and K are 20 and 2, respectively. The default choice for the average is a simple moving average, but other types of averages can be employed as needed. Exponential moving averages are a common second choice. Usually the same period is used for both the middle band and the calculation of standard deviation. Sharp Charts Calculation: 1. Middle Band = 20-day simple moving average (SMA) 2. Upper Band = 20-day SMA + (20-day standard deviation of price x 2) 3. Lower Band = 20-day SMA – (20-day standard deviation of price x 2)
- 18. 10 | P a g e Chart # i | Closing Price Daily, 20-period/2-deviations Bollinger Bands; Example Bollinger Bands, however, are created by calculating two standard deviations above and below a 20-day simple moving average. Therefore, the price should remain within the bands about 95% of the time. The determinative parameter for BB: In general, the determinative parameter for BB is the period/type of MA, because bands are derivative lines from the MA parameter. The major value for trading of this indicator is in bands. Normal distribution suggests that some variable – in our case this is price, will stay in a range of two standard deviations with a probability
95%, in range of three standard deviations with a probability more than 99%. 1. MA – period, its type and type of price – close, high, low, etc. 2. Number of standard deviations. The greater this parameter – the wider band lines, and the less probable that market will touch it. In most cases there is not much sense to apply more than 3 standard deviations. We should keep in mind, that applying 2 deviations tells that price action will be inside the bands with probability 95%, 3 standard deviations – 99%. So, market will touch the bands very rarely. If applying of 3 deviations suggests, that price will have to remain between the bands with 99% probability, and market occasionally touches upper or lower band. The MA period has the same sense as in a simple MA. The longer the MA-period, the more smooth and lazy these MA & BB lines. Also they will be wider. In fact, this is the same sensitivity to most recent price action – if you appoint a short period, then bands of BB will be 155.00 160.00 165.00 170.00 175.00 180.00 185.00 7‐Mar 17‐Mar 27‐Mar 6‐Apr 16‐Apr 26‐Apr 6‐May Price MB UB LB
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