Kazi Mohammed Kamal Uddin* Md. Farhad Hossain**
Priyanka Paul***
Gobinda Karmokar****
Abstract: Technical Analysis or the use of past prices to infer private information has value in a model in which prices have not entirely revealed, and traders have rational conjectures about the relation between costs and signals. A two-period dynamic model of equilibrium is used to demonstrate that prudent investors use historical prices in their demands and to illustrate the sensitivity of the value of technical analysis to changes in the benefits of the exogenous parameters. One of the main obstacles is the highly subjective nature of the technical analysis is the presence of geometric shapes in historical price charts is often in the eyes of the beholder. This paper establishes a systematic and automatic approach of technical pattern recognition using Candlesticks charts, Bollinger band, and also by MACD line. Apply this method to different share prices of selected companies on the Dhaka Stock Exchange (DSE) from 2015 to 2016 to evaluate the effectiveness of technical analysis. This study has taken six companies from three different sectors. The results of Dutch-Bangla Bank Limited are presented in this paper because almost the same results have produced for other selected companies. The results showed that in all the cases, buyers dominated the share prices during the session, and the bid prices are higher. The results also assess the perfect timing of buying or selling shares.
Keywords: Technical Analysis, EMA, MACD, Bid prices, and DSE
Introduction
In finance, technical analysis is a security analysis discipline for forecasting the direction of prices through the study of past market data, primarily price and volume (Kirkpatrick and Dahlquist, 2006). Behavioral economics and quantitative analysis incorporate substantial aspects of technical analysis, (Lo et
* Kazi Mohammad Kamal Uddin, Department of Economics, Comilla University, Cumilla, Bangladesh; [email protected]
** Md. Farhad Hossain, Department of Statistics, Comilla University, Cumilla, Bangladesh; [email protected]
*** Priyanka Paul, Department of Statistics, Comilla University, Cumilla, Bangladesh
**** Gobinda Karmokar Assistant Researcher, ICDDRB.
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al, 2010) which being an aspect of active management stands in contradiction to much of modern portfolio theory. Numerous equity valuation techniques have developed since the late 1800s (Rutterford, 2004). There are mainly two distinct types of equity valuation techniques used by equity analysts, namely, Fundamental Analysis and Technical Analysis. Both methods seek to identify profitable investment opportunities, but they approach this problem from entirely different perspectives. The goal of a fundamental analyst is to determine whether a security is undervalued or overvalued relative to its “true” value. A technical analyst uses historical prices and volumes data to forecast future price trends of the security (Levy, 1966).
Jackson (2006) pointed out that technical analysis is, in essence, an umbrella term for a myriad of technical indicators. Professional chart patterns and functional theories such as the Dow Theory, Elliot Wave Theory, Kondratieff Wave Theory, provided the early building blocks of technical indicators. Other technical signs that have introduced in recent times include Trend Following, Breath, Momentum, Sentiment Indicators (Alexander, S. 1961), etc. These indicators have developed to give a technical analyst a wide variety of tools to analyses the market and also as pointed out by Pring (1991, p. 9), “No single indicator can ever expected to signal all trend reversals, and so it is essential to use a number of them together to build up a consensus.” However, the increasing popularity of technical analysis, especially among asset management firms as noted by Menkhoff (2010), points towards possible market inefficiencies in fully reflecting information in prices.
Technical Analysis is the process of analyzing market (price) action and using past data on charts to attempt to predict the highest likely outcome of the future. It should always be complimented with fundamental analysis for optimal results.
There is a lack of acceptance and understanding of the art of technical analysis.
That’s right, technical analysis is an art, and it can mastered in a concise period.
There are no financial statements to read over. It is the art of reading and interpreting charts, their patterns, and determining the highest likely short-term outcome of the future. “Technical Analysis is perhaps the oldest device designed to beat the market. It has secular history given that its origins can traced to the seminar articles published by Charles H. Dow in the Wall Street Journal between 1900 and 1902, and its basic concepts became popular after contributions by Hamilton (1922), and Rhea (1932). A complete jargon of words and pictures has developed since then, and many traders, nowadays, take their buying and selling decisions based on technical analysis results appearing on their screen.
Technical analysis dates back hundreds of years ago. According to historical records, a great Japanese rice trader named Homma Munehisa (1724-1803) fathered candlestick charting and made a profit of over $100 billion. He was considered the most excellent trader in the history of the financial markets.
Therefore, technical analysis has emerged from Japan. Candlesticks were developed in the 1800s and reported to have initially used by Japanese rice
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traders. Popular traditional candlestick patterns are used by technical analysts.
Newer candlestick patterns are sometimes identified, such as the hikkake pattern that was named and utilized by Daniel L.Chesler. The main objective of this study is to predict the future price movement in the share prices through technical analysis and assist the investors in making investment decisions in different sectors. Also, to see warnings in advance and give enough time to react through the Candlestick chart.
Methodology Data Source
Secondary Data of the daily share prices of the last two years (from 1-January- 2015 to 31-December-2016) was collected from the website www.dse.bd for six leading companies based on their necessary information of three individual sectors (banking, textile, and pharmaceutical) for this study and their technical analysis has carried out using various tools and techniques of technical analysis.
The selected companies are Dutch-Bangla Bank Limited, Brac Bank Limited, Alhaj Textile Mills Limited, Square Textiles Limited, Square Pharmaceuticals Limited, and Ambee Pharmaceuticals Limited.
Technical Analysis
Technical assumes that market psychology influences trading in a way that enables predicting when a stock will rise or fall. Technical analysts are market timers, and believe that it can apply just as easily to the markets as a whole as to an individual stock. Levy (1966) defines technical analysis as the recording of the actual history of trading (including both price movement and the volume of transactions) for one stock or a group of equities and deducing the future price trend from this historical analysis. A method of evaluating securities by relying on the assumption that market data, such as charts, price, volume, and open interest, can help predict future (usually short-term) market trends. Unlike fundamental analysis, the intrinsic value of the security has considered. Technical analysts believe that they can accurately predict the future price of a stock by looking at its historical prices and other trading variables. Several studies have conducted that analyze whether technical analysis can add any significant value to an investor’s portfolio. These studies have, however produced mixed results thus far. Jensen and Bennigton (1970) and Fama and Blume (1966) analyzed the profitability of various technical trading rules relative to a buy and hold strategy. They both found that the technical regulations could not outperform a buy and keep strategy.
Brock et al. (1992) highlighted that technical analysis is the original form of investment analysis as it came into widespread use long before the period of extensive and fully disclosed financial statements, which enabled fundamental analysis to develop. The relationships among the security market variables such as price levels, trading volumes and price movements are studied sometimes to gain insights into the supply and demand for securities. Rather than concentrating on earnings, the economic outlook, and other business-related factors that influence security’s value, technical analysis attempts to determine the market forces at
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work on certain security or the securities market as a whole. Technical analysts do not try to measure a security’s intrinsic value, but instead, use charts and other tools to identify patterns that can suggest future activity. Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
Result and Discussions
In figure 1, the real body of the candle is red or green. When the opening price is higher than the closing price, the actual body turns to red, and it is called hollow.
When the closing price is higher than the opening price, the actual body becomes green, and it has called filled. In this candlestick, there are some long upper shadows and short lower shadows, which indicate that buyers dominated the share prices during the session, and for this reason, bid prices are higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, long lower shadows and short upper shadows indicate that sellers dominated the share prices during the session and drove prices are lower. However, buyers later resurfaced to bid prices higher by the end of the course and the strong close created a long lower shadow.
Figure 1: Candlestick chart of Dutch Bangla Bank Limited
In figure 2, the Bollinger band chart of the stock price of Dutch Bangla bank limited shows a “blue” and “red” line, where the blue line represents that the stock prices are high and the red line represents that the stock prices are low. So this Bollinger band chart can help the trader to take a beneficial decision when buying or to sell the shares. At the beginning, the shadow is wider so that the value of the stock prices is moving upward, and in the middle of the plot, the shadow becomes decay; that’s why the prices are going downward.
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Figure 2: Bollinger bands chart for Dutch Bangla Bank Limited
Figure 3 indicates that at the very beginning of the chart the variation between the 12-days-EMA and 26-days-EMA is high, that’s the trader can easily make decision for trading and the difference is getting down slowly and the 12days- EMA and 26 days-EMA line are almost same. That means the market condition is stable. So the trader should wait until the variation hold.
Figure 3: 12days-EMA vs. 26days-EMA of Dutch Bangla Bank Limited
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Figure 4: MACD vs. 9days-EMA of Dutch Bangla Bank Limited
Figure 4 indicates that the MACD line cross over the nine day-EMA line (signal line) at the time 1 January 2015 to 4 January 2015 over the zero lines i.e., at this point, the trader has to sell stock as a good trader. We also saw in the plot that the MACD line cross down the nine day-EMA (signal line) at the time 5 January 2015 to 7 January 2015, i.e., the trader should buy the stock at this time, and this will continue at the end of the series.
Conclusions
Technicians believe that all the information they need about a stock can found in its charts. Technical traders take a short-term approach to analyze the market. A technician believes that it is possible to identify a trend, invest, or trade based on the direction and make money as the pattern unfolds. Because technical analysis can apply to many different time frames, it is possible to spot both short-term and long-term trends.
The primary goal of this study was to predict the future price movement in the share prices; empirical results, however show that when considering DSE-listed stocks, the technical analysis plays the most significant role in the DSE. The empirical results show that technical analysis has higher explanatory power than the fundamental analysis model in isolation and as well as the model that integrates both valuation techniques.
The prominence of the technical analysis model thus challenges the random walk hypothesis with regards to DSE-listed stocks. Furthermore, in Bangladesh, the best predictors of stock price movements are shown in this study by closing prices index.
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Comilla University Journal of Social Sciences Volume II, No. 1 January-December 2019 ISSN: 2663-2659