ANALYSIS THE EFFICIENCY OF MULTIPLE TECHNICAL INDICATORS WITH REFERENCE TO BANK NIFTY INDEX FOR THE PAST TWO YEARS
Mr. Chandra Bhooshan Singh Mr. Mohit Raikwar
Assistant Professor, IMIRC, Indore
Abstract- Share market anticipation has always been one of the biggest topics in research, as well as a big challenge because of its complex and volatile nature. Technical indicators are used by traders to gain insight into the supply and demand of financial securities and market psychology. There are several types of indicators which indicate the confirmation of price direction or market trend. Together, these indicators form the basis of technical analysis. Metrics, such as trading volume, provide clues as to whether a price move will continue. In this way, indicators can be used to generate buying and selling indications signals. This paper, analysis the effectiveness of multiple technical indicators upto to five simultaneously. In this paper we present a system that simultaneously uses five technical indicators to enhance the predictability of the daily stock price trends. The performance shows that this system can achieve higher accuracy and return than single indicators.
1. INTRODUCTION
In this paper we will study and research on the efficiency of technical indicators and learn to calculate common technical indicators for trading using formulae. Many researcher and experts show technical indicators these days but it is important to understand the algorithm behind the indicators to have confidence while trading.
Technical indicators are used to figure out the following tasks:
• Check whether the stock is overbought or oversold
• Check whether the uptrend in the stock is beginning
• What should be the optimal stop loss or target price?
• What's the maximum or minimum price stock can reach in near to midterm?
• How to get rid of minor stock fluctuations in calculation of buying price?
2. LIMITATIONS OF THE STUDY
• Technical indicators may not hold good always.
• Technical analysis does not consider the economy of the country, performance of the company etc
• Because of false result, As markets behave very differently in some days and movement of stock depends on various factors such as fundamentals of the company, emerging news related to the stock, sector or macro economy in general, statements of Senior Management etc.
• Sometimes we observed stock goes down even after announcing quarterly profit. It's because of profit booking by big players like FII, Mutual Funds etc. In simple words stock values went up in the past as big players assessed that the company would be in profit in the coming quarter and now traders or investors start selling off after announcement of quarterly result. There can be several other reasons like quarterly result is below analysts' expectation and they don't see further growth in this stock in future.
3. REVIEW OF LITERATURE
The data collected are analyzed with the help of following tools;
• Technical Charts
• Technical indicators o Simple Moving Average o Exponential Moving Average o Relative Strength Index (RSI) o Commodity Channel Index (CCI) o Williams %R
3.1. Technical Chart
Top 3 charts in stock market
Line chart
Bar Chart and Japanese Candlestick Chart a. Line Chart
A line chart is the most basic type of trading chart created through the connection of a series of data points with unbroken line(s).
A line chart is a closing-price-only chart type. A time frame is still chosen, such as a 1- minute interval, but only the closing prices for those 1-minute intervals are recorded. Each closing price is connected to the next closing price via a single continuous line.
Figure3. A: Line Chart of Nifty 50.
b. Candlesticks and Bar charts
Candlestick graphs are similar to Bar charts (HLOC). They are both technical analysis indicators, and they both require a certain understanding before traders can use them and learn from them effectively. The main difference is that a HLOC chart lays out the information without the use of the ‘body’ of a candlestick.
Figure 3.B: Showing basic structure of bar chart and candles chart.
3.2 Technical Indicator
In technical analysis of stocks, a technical indicator is a mathematical calculation based on historic price, volume, or (in the case of futures contracts) open interest information that
aims to forecast financial market direction. Technical indicators are fundamental part of technical analysis and are typically plotted as a chart pattern to try to predict the market trend. Indicators generally overlay on price chart data to indicate where the price is going, or whether the price is in an "overbought" condition or an "oversold" condition.
There would be more than 3000+ indicator available. We are study and analysis only a major indicators such as
a. Simple Moving Average
It is one of the simplest technical indicators. It's an average of historical N time periods.
Let's say you want to calculate 5 Days moving average. You can calculate average and take previous 5 days period closing market price values and average them up. It helps to remove fluctuations. For example stock moved upward by 20% yesterday (hit 'upper circuit' - trading terminology for the max price stock can reach in a day, after that you can't trade in the stock on that particular day), If you take yesterday's closing price for trading and set market price based on that, you may lose some money (depending on luck) as stock gained so much last day. Hence it is recommended to take moving average of last 5Days, 20 Days or 50 Days to calculate the buying price for trading.
b. Exponential Moving Average
The exponential moving average gives greater weightage to recent periods. For example if you calculate 5 Days exponential moving average it gives more importance to today's and previous closing price than the closing price which was 5 days before. Similarly if you take bigger window and calculate 20 Days moving average it gives more weightage to this week closing price than the 3 weeks prior price.
Step1: Calculate Average of T Time Period
Suppose you want to calculate 5 Days Exponential moving average so time period T would be 5 so it will be an average of (T - 4) through T in the first iteration.
Step2: Apply Exponential Moving Average Formula
In the second iteration you need to perform the following calculation. Prev. Day EMA is what we calculated in step 1.
= (Today's Closing Price)*(2/(T+ 1)) + (Prev. Day EMA) * (1-(2/(T+1))) C. Relative Strength Index (RSI)
Relative Strength Index measures whether stock is overbought or oversold. If a stock is strongly overbought it may have pull back very soon. Similarly if a stock is oversold but company is fundamentally strong the likelihood of increase in share price of the stock in near or midterm is very high. Many traders use RSI as a method to determine whether they should invest in the stock now or should they wait for the reversal.
Thumb Rule
If RSI is less than 30, stock is considered 'Oversold' If RSI is greater than 70, stock is considered 'Overbought'
Step1: Calculate Gain or Loss
First step is to calculate a day change based on closing price of the stock. Suppose stock price of the stock increases from 100 to 120. It is a gain of 20. Similar if it declines from 100 to 80, it's a loss of 20.
Step2: Calculate Average Gain or Loss
Suppose you are calculating 14 Days RSI so you need to calculate 14 days simple moving average of gain or loss. It's a simple average of previous 14 values of gain or loss. See the snapshot below. Let's say if you calculate 7 days RSI so it will be an average of previous 7 values.
Final Step: Calculate RSI
By using Avg. Gain and Avg. Loss you can calculate RSI using the formula below. When Avg. Gain is greater than Avg. Loss, RSI is above 50 which shows bullish pattern. Similarly when Avg Loss > Avg Gain, RSI is below 50 and shows bearish behavior.
100-(100/ (1+ (Avg Gain/Avg Loss)))
d. Commodity Channel Index (CCI)
CCI compares current price to average price over a specific time period. When CCI is greater than 100 it indicates buy signal (price going to be up). When CCI is less than -100 it indicates sell signal (likely downfall of prices).
Step 1: Calculate Typical Price
Typical price is defined by a simple average of closing, low and high price of any given trading day.
Typical Price = (High + Low + Close) / 3
Step2: Calculate 20 Days Moving Average of Typical Price
CCI of 20 Days period is very popular in trading world. Hence we are taking 20 days simple moving average of typical price in this step.
Step3: Calculate Avg. of Absolute Deviation
In this step we are taking deviation of each of "typical price" points from 20 days moving average of typical price. We can calculate mean deviation using =AVEDEV ( ) formula.
=AVEDEV (range of prev. 20 days typical price, range of prev. 20 days typical price) Step4: Calculate CCI
Final step is to perform CCI calculation by using the following formula -
CCI of 20 Days = (Typical Price - 20 Days Simple Moving Average of Typical Price) /(0.015 * Avg. Deviation)
e. Williams %R
Williams’s %R is also called as Williams Percent Range. It lies between 0 and -100 and measures momentum status of stock - if a stock is overbought or oversold. If a stock is above -20, it is considered overbought. If a stock is below -80, it is considered oversold Many traders also use it to find out if a reversal in stock is nearby (i.e. changing trend of stock). If the indicator is moving below -80 and then the price starts going up, it means price would remain up for a next few days or sessions.
This formula was discovered by Larry Williams who made a million dollar in an year in 1980s. His strategy was based on this indicator.
= (Highest value of high of last 14 days - Closing Price) / (Highest value of high of last 14 days - Lowest value of low of last 14 days) * -100
4. PROBLEM STATEMENT
To find whether technical indicators are useful in taking investment decisions by comparing its accuracy with confirmation of more indicators reference to Banki Nifty index for the past two years. Identifying trends is important. But the major problem is how can spot a trend is difficult, as the market never moves in a straight line. A stock will never fall continuously on a given day and rise on another. "Generally, higher highs and higher lows indicate an uptrend, whereas lower highs and lower lows mean a downtrend”. To find the trends whether technical indicators are useful in taking investment decisions by comparing its accuracy with other indicators to analysis price behavior of the Bank Nifty index for the period where the Indian equity market have witnessed several turbulences and exuberance due to pandemic situations.
5. RESEARCH METHODOLOGY 5.1. Data Collection
This paper is based on analytical research. The shares of companies which are indexed in NSE’s Bank nifty are considered for analysis. The price quotes have gathered from the website of investing.com.
To achieve the identified objectives, the data has been collected relating to the price behavior of the Bank nifty index for the period from August 2019 to 2021 the period where the Indian equity markets have witnessed several turbulences and exuberance due to pandemic situations. Analysis is done on Bank nifty index based on the technical confirmation of five special technical indicators, to calculate the exact efficiency, our analysis has mainly focused when special bullish and bearish signal confirmation are identified.
5.2 Methodology
The collected Weekly data Bank nifty index is incorporated in the investing.com website www. Investing.com is a technical analysis web application to identify, explore and analyses technical indicators in financial market data. It has the capability of measuring efficiency and based on which trading strategies can be designed for further refinement and usage. By using the web application, the collected data are subjected for back testing to identify confirmation signal of (Table 2 and 3) different bullish reversal and bullish continuation and bearish reversal and bearish continuation for weekly trading basis. The parameter to find the efficiency of indicators signal are bullish, strong bullish, bearish and strong bearish and the efficiency of all indicators are calculated according to mentioned weight age in below table 1.
Table1. Signal weight age of price trend Weight age Taken
S. No. Signal Weight age in %
1 Bearish 15
2 Bullish 15
3 Strong Bearish 20
4 Strong Bullish 20
5 No Confirmation 0
Table2. Bullish and strong bullish signals have observed in Bank nifty index for the period from Aug 2020 to 2021.
Bullish Signal Occurrences (End of the Week)
S.
No.
Date William s
%R
Commodi ty Channel
Index (CCI)
Relative Strength Index
(RSI)
Simple Moving Average
Exponential Moving Average
Efficiency (In %)
1 09-09-2019 Strong
Bullish Bullish Bullish No
confirmation No
confirmation 50
2 07-10-2019 Strong
Bullish Bullish Bullish Bullish Bullish 80
3 28-10-2019 Strong
Bullish Strong
Bullish Strong
Bullish Bullish Bullish 90
4 01-06-2020 Strong
Bullish Strong
Bullish Strong
Bullish Bullish Bullish 90
5 28-09-2020
Strong
Bullish Bullish Bullish Bullish Bullish 80
6 02-11-2020 Strong
Bullish Strong
Bullish Strong
Bullish Strong Bullish Strong Bullish 100
7 26-04-2021 Bullish Bullish Bullish Bullish Bullish 75
8 17-05-2021 Strong
Bullish Bullish Bullish Bullish Bullish 80
Efficiency Of Multiple(All) Technical Indicators : 80.625
Table3. Bearish and strong bearish signals have observed in Bank nifty index for the period from Aug 2020 to 2021.
6. RESULT AND ANALYSIS
The research data used in this study is the weekly prices (open, high, low, and close) of Bank nifty of National Stock Exchange of India between Aug 1st, 2019 to Aug 31st, 2021.
The stock price data used is of the type end of the week (EOW). In this Paper we have studied and Analysis the efficiency of following technical indicators for the Bank nifty index from August 2019 to April 2021 for two year.
According to result analysis, studied of technical indicators, given reliable result as shown in Figure 1 and table 4 and 5 for the bank nifty index from Aug 2019 to Aug 2021.
Let’s See the Chart and tables.
Figure 6. A: Analysis of Special Candles Formation from April 2020 to September 2020 on Nifty 50 Index.
The following table is showing the information regarding the signal of bullish and bearish confirmation for the last two years
Bearish Signal Occurrences(End of the Week) S.
No.
Date Williams
%R
Commodity Channel Index (CCI)
Relative Strength Index (RSI)
Simple Moving Average
Exponential Moving Average
Efficiency (In %)
1 15-07-2019 Bearish Bearish Bearish Bearish Bearish 75
2 13-01-2020 Bearish Bearish Bearish Strong
Bearish Strong
Bearish 85
3 17-01-2021 Bearish Bearish Bearish Bearish Bearish 75
4 22-01-2021 Strong
Bearish Bearish Bearish Bearish Bearish 80
5 15-03-2021 Strong
Bearish Bearish Strong
Bearish Bearish Bearish 85
6 10-05-2021 Strong
Bearish Bearish Bearish Bearish Bearish 80
7 26-07-2021
Strong
Bearish Bearish Bearish Bearish Bearish 80
Efficiency Of Multiple(All) Technical Indicators: 80
Table 4: Actual accuracy of bullish signal with the confirmation of multiple indicators Bullish Accuracy
S. No. Technical
indicators No. Of
confirmation Theoretical outcome
Actual outcome with confirmation
of each other
indicators Accuracy level Bearish Bullish
1 Williams %R 8 Bullish 0 8 100%
2
Commodity Channel Index
(CCI) 8 Bullish 0 8 100%
3
Relative Strength Index
(RSI) 8 Bullish 0 8 100%
4 Simple Moving
Average 8 Bullish 0 0 0%
5
Exponential Moving
Average 8 Bullish 0 0 0%
Table 5: Actual accuracy of bullish signal with the confirmation of multiple indicators Bearish Accuracy
S. No. Technical
indicators No. Of
confirmation Theoretical outcome
Actual outcome with confirmation
of each other
indicators Accuracy level Bearish Bullish
1 Williams %R 7 Bearish 7 0 100%
2
Commodity Channel Index
(CCI) 7 Bearish 7 0 100%
3
Relative Strength Index
(RSI) 7 Bearish 7 0 100%
4 Simple Moving
Average 7 Bearish 7 0 100%
5 Exponential
Moving Average 7 Bearish 7 0 100%
7. FINDINGS OF THE STUDY
Study of price charts with multiple technical indicators Moving Average, Exponential moving average William %R, RSI and CCI.
Multiple confirmations of technical indicators are more than 75% accurate as per the past two year Bank nifty index.
Technical indicators are very much supported by other indictors.
Mentioned technical indicators show accurate confirmation.
William %R and RSI are the most accurate indicators among the 5 indicators (75%
accuracy).
Investors can trust on technical indicators in their trading decisions. Because the accuracy level of the most accurate signal is more than 75%
Investors should consider the other factors along with technical indicators. It helps to improve the accuracy level.
8. PROPOSED SOLUTION
Trader gets loss due to follow the trading strategy blindly based on single technical indicators without the confirmation of other indicators. Study of various Special technical indicators in Bank nifty index and analysis the indications of that indicators work most efficiently with the confirmation of multiple types of technical tools indications using lagging and leading indicators. Investors must have deep knowledge about signal confirmation, price trend and technical indicators like Williams %R, Commodity Channel Index (CCI), Relative Strength Index (RSI), Simple Moving Average, Exponential Moving Average.
Investors should consider other confirmation factors which affecting the market movements. Investors need to be waiting for the signal of special technical indicators.
Because the past two year study of Bank nifty index shows that many number of true signal from technical indicators has occur and trade has successful with the confirmation of other indicators simultaneously.
9. CONCLUSION
The objective of this paper is show and explains mathematics behind the technical indicators. The price movement confirmation with the five technical indicators can dramatically improve our chart reading skills, price movement and anticipate market trend.
If we apply only single or minimum technical indicators, this can lead to inaccurate price interpretation and subsequently to bad trading decisions. In this paper, combination of leading and lagging technical indicators are applied to daily direction of a stock price using streaming technical chart via investing.com. The case study results showed that all indicators are shows that the prediction performance and the profitability of the system are enhanced.
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