Fundamental of Technical Analysis and Algorithmic Trading

Report
Doğu Akdeniz Üniversitesi
Faculty of Business and Economics
Department of Banking and Finance
Saeed Ebrahimijam
FINA417
FALL 2013-2014
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Markets Linkage
Sectors and Industry Groups
Using Relative Strength between Stocks
Top-Down Analysis
Some evidence from different markets
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and Algorithmic Trading
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Till now our approach to investing has traditionally emphasized a single-market approach.
A stock trader, for example, would study the price charts of the stock market or individual
common stocks with little consideration of outside market influences. It was considered
sufficient to study the price charts of the market in question along with its own set of internal
indicators. The same attitude was true of traders in other asset classes. Bond traders studied
bond charts, while commodity traders charted the commodity markets. Currency traders
limited their chart work to the currencies they were trading. That is no longer the case. Chart
analysis has taken a major evolutionary step over the last decade by emphasizing a more
universal intermarket approach.
Some understanding of how the different asset classes interact with each other is important for
at least two reasons:
First, such an understanding helps you appreciate how other financial markets influence
whichever market you’re interested in. For example, it’s very useful to know how bonds and
stocks interact.
If you’re trading stocks, you should be watching bonds. If you’re a bond trader, you should be
monitoring the direction of stocks. Very often, chart action in one market will give you a clue
about another. For example, a jump in bond prices is often associated with a drop in stock
prices.
In another illustration of how one market impacts on another, a falling U.S. dollar is
inflationary, which is usually manifested in rising commodity prices.
Gold, for example, is considered to be a leading indicator of inflation.
The technical investor with some knowledge of how the two markets interact with each other
(and some knowledge of charting) could have spotted the important trend changes in those
two markets and acted accordingly.
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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relative strength analysis and its particular
importance in choosing the right sectors and
industry groups.
- The same holds true for mutual funds themselves.
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Relative strength analysis adds an important
dimension to market analysis by telling us:
how one fund is performing relative to the
rest of the market or how it’s performance
compares to other fund competitors in the
same category.
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and Algorithmic Trading
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and Algorithmic Trading
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It simply compares the performance of one item
(such as a stock) with another item (such as an
industry group).
The objective is to determine whether the first item’s
price is advancing or declining faster than the second
item’s price. In other words, is the first item
outperforming or underperforming the second item
on a relative basis?
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Relative strength analysis is normally used to
compare an industry group’s performance to the
overall market or a particular stock’s performance to
its industry group.
However, it can also be used to compare virtually any
two items as long as they have prices (such as two
stocks, two commodities, two industry groups, etc.).
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and Algorithmic Trading
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Technicians compare industry groups to the
market as a whole using relative strength
analysis to determine which industry groups are
outperforming or underperforming the overall
market.
A ranking of the various industry groups can be
made according to their relative strength.
Those industry groups with the highest rankings
are candidates for buying;
whereas those with low rankings represent
stocks that have the potential for selling or short
sales.
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and Algorithmic Trading
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Figure 9-1 compares the electrical equipment
industry group to the S&P 500 index. Note
that the industry’s relative strength rose
throughout most of the time period shown.
Therefore, it was outperforming the market.
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and Algorithmic Trading
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and Algorithmic Trading
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Figure 9-2 demonstrates an industry group
(restaurant) with declining relative strength
when compared to the S&P 500 index. Thus,
it was underperforming the market as a whole
for the time period shown.
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and Algorithmic Trading
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and Algorithmic Trading
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In a fashion similar to comparing an industry
group to the overall market, a technician can
use relative strength analysis to compare an
individual stock’s price performance to that
of the industry to which it belongs.
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and Algorithmic Trading
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and Algorithmic Trading
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Percentage Change Method
Alpha Method
Trend Slope Method
Levy Method
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and Algorithmic Trading
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RS line:
technical tool that is indispensable for that purpose, the
relative strength (RS) line. It’s usually plotted at the bottom
of stock charts in newspapers and charting services.
How to derive the line?
by dividing the price of an individual stock (or a market
sector) by market or sector or other asset index.
Interpretation:
-When the RS line is rising, the stock (or sector) is
outperforming the market.
-When the RS line is falling, the stock (or sector) is doing
worse than the market.
- It’s generally better to buy stocks (or sectors) with rising
RS lines and avoid those with falling RS lines.
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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and Algorithmic Trading
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1- Choosing the appropriate chart and period.
2- Analyzing Market Index Trend
3- Analyzing the top 50 companies in the
market Index. ( or industry which the security
is between them.)
4- Look at the Price trend for short-term, midterm, long–term Horizons.
5- Find the Support and Resistance lines and
Gaps in the trend.
6- Use technical analysis tools (patterns and
indicators) to find the best time to buy or sell.
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and Algorithmic Trading
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The William O'Neil CANSLIM Method
James P. O'Shaughnessy Method
Charles D. Kirkpatrick Method
Value Line Method
Richard D. Wyckoff Method
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and Algorithmic Trading
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