ACE 427 Spring Lecture 11. Technical Analysis. by Professor Scott H. Irwin

Transcription

1 ACE 427 Spring 2010 Lecture 11 Technical Analysis by Professor Scott H. Irwin Required Reading: Technical Analysis. Wikipedia. [ Purcell, W.D. and S.R. Koontz. Ch. 4: Technical Analysis: The Bar Chart, Ch. 5: Technical Analysis: Alternatives to Bar Charts, Agricultural Futures and Options: Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle River, New Jersey. (ACE 427 Class Website) Ch. 5: Technical Analysis: Alternatives to Bar Charts, Agricultural Futures and Options: Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle River, New Jersey. (ACE 427 Class Website) Purcell, W.D. and S.R. Koontz. Ch. 6: Psychology of the Markets, Agricultural Futures and Options: Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle River, New Jersey. (ACE 427 Class Website) ACE 427, University of Illinois 11-1

2 Introduction Fundamental analysis: Definition: An assessment of based on the underlying and factors and the changes in those relationships Goal: Estimate and compare to Bullish: Value > Price Bearish: Value < Price Technical analysis: A forecasting method for price movements using No explicit use of the fundamentals Typically based on arguments ACE 427, University of Illinois 11-2

3 Pring (2002, p. 2), a leading technical analyst, provides a more specific definition: The technical approach to investment is essentially a reflection of the idea that prices move in trends that are determined by the changing attitudes of investors toward a variety of economic, monetary, political, and psychological forces. The art of technical analysis, for it is an art, is to identify a trend reversal at a relatively early stage and ride on that trend until the weight of the evidence shows or proves that the trend has reversed. Technical analysis includes a variety of forecasting techniques analysis recognition analysis indicators Seasonal tendencies analysis Computerized ACE 427, University of Illinois 11-3

4 Numerous surveys indicate that market practitioners attribute a to technical analysis Smidt Surveyed trading activities of amateur traders in the US commodity futures markets in 1961 About of respondents claimed that they used either exclusively or moderately in order to identify Group of Thirty Surveyed the views of market participants on the functioning of the foreign exchange market in 1985 Results indicated that of bank respondents and of the securities houses believed that the use of technical analysis had a significant impact on the market ACE 427, University of Illinois 11-4

5 More recent surveys: Commodity trading advisors and hedge fund managers rely heavily on computer-guided About of foreign exchange traders around the world believe that technical analysis is the major determining exchange rates in the short-run up to six months Technical methods are highly! Group of Thirty study conclusion: Technical trading systems, involving computer models and charts, have become the vogue, so that the market reacts more sharply to short term trends and less attention is given to basic factors In this lecture we will focus only on learning the technical methods Assessment of their usefulness is left to the next lecture ACE 427, University of Illinois 11-5

6 Charting ACE 427, University of Illinois 11-6

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27 Overbought/Oversold Indicators ACE 427, University of Illinois 11-27

28 Positive Negative Closing Price Price Price Price Day Change Change Change SX04 4/2/ SX04 4/5/ SX04 4/6/ SX04 4/7/ SX04 4/8/ SX04 4/12/ SX04 4/13/ SX04 4/14/ SX04 4/15/ SX04 4/16/ SX04 4/19/ SX04 4/20/ SX04 4/21/ SX04 4/22/ SX04 4/23/ RSI ACE 427, University of Illinois 11-28

29 Contrary Opinion Indexes Another form of overbought/oversold indicator Designed to measure the of market participants regarding future price trends Various indicators are widely followed in financial markets Bullish Consensus Market Vane Construction of Consensus Indicators A sample of market analysts, traders, or investors is surveyed for their on price trends Reading newsletters, conducting mail surveys, or by personal interview Each of the individuals surveyed is then placed in a category indicating the of their market view ACE 427, University of Illinois 11-29

30 The rating scale can be as simple as either bullish or bearish, or some type of numerical scale of the degree of bullishness In the first case, the consensus indicator is simply the of individuals with a bullish market view In the second case, the consensus indicator is the of the individual ratings. Use of Contrary Opinion Indicators High percentage of traders High percentage of traders ACE 427, University of Illinois 11-30

31 AgMAS Consensus View Indicators For about 3 years, each Wednesday, after the close of market trading, each advisory service in the AgMAS study was rated as to the for a commodity Five categories: 0-bearish, 25-bearish-neutral, 50-neutral, 75-bullish-neutral, and 100-bullish Rating is based on and current recommendations regarding market positions Ratings refer to over a relatively short time-horizon, in the range of two to six weeks into the future. Ratings for individual advisory services averaged for a commodity ACE 427, University of Illinois 11-31

32 Example Advisor Rating Average 70 ACE 427, University of Illinois 11-32

33 AgMAS Consensus View Indicator for Corn Consensus View Level /17/96 12/17/96 5/17/97 10/17/97 3/17/98 8/17/98 1/17/99 Date AgMAS Consensus View Indicator for Soybeans Consensus View Level /17/96 12/17/96 5/17/97 10/17/97 3/17/98 8/17/98 1/17/99 Date ACE 427, University of Illinois 11-33

34 AgMAS Consensus View Indicator for Wheat Consensus View Level /17/96 12/17/96 5/17/97 10/17/97 3/17/98 8/17/98 1/17/99 AgMAS Consensus View Indicator for Live Cattle Date Consensus View Level /17/96 12/17/96 5/17/97 10/17/97 3/17/98 8/17/98 1/17/99 Date ACE 427, University of Illinois 11-34

35 Trading Systems A technical trading system consists of a set of that result from parameterizations, and each trading rule generates (long, short, or out of the market) according to their parameter values Popular technical trading systems include Moving averages Channels Momentum oscillators ACE 427, University of Illinois 11-35

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37 Literally thousands of technical trading systems! ACE 427, University of Illinois 11-37