A study on Market Trend Prediction using Aroon Oscillator with special reference to the Indian private sector banks

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1 A study on Market Trend Prediction using Aroon Oscillator with special reference to the Indian private sector banks P. Selvam Assistant Professor Department of Management Studies Sree Sastha Institute of Engineering and Technology, Chennai Abstract When it comes to using forecasting tools, almost all investors pay their utmost attention to select the best tools which would enable investors to comprehend the market trend. Investors have ideas about technical indicators to fine-tune their trading decisions, but they fail to know which indicators to be used and which would work best in trending and trendless market. While there have been various technical indicators to figure out the market trends, one of the technical indicators namely Aroon Indicator continues to remain popular because of it accuracy level in predicting trend direction and strength. This indicator is used as a tool of immense help for traders and investors to figure out if a long-term is ending or simply remaining the same before another move. If an investor adopts stock market investment the strategy by using Aroon Indicator, he would be able to determine whether the market is moving upward or vice versa. In this research article, closing prices of Axis Bank have been taken for the analysis based on which investors will be able to acquire clear knowledge in predicting market trend which would ultimately result in profits. Key words: Technical Analysis, Stock Trading Decision, Market Trend Prediction, Investment Analysis and Buying and Selling signal Introduction: Aroon Indicator was postulated by Tushar Chande in the year The word Aroon is derived from Sanskrit which means Dawn s-early Light. This indicator was coined in such a way because; it is designed to find the beginning of a new trend. This indicator comprises 2 lines namely Up and Down which show upward strength movement and downward strength movement respectively. The Up line is the amount of time between the start of a time period and the point in which the highest price during that period occurred on a percentage basis. Similarly, The Down is the amount of time between the start of a time period and the point in which the lowest price during that period occurred on a percentage basis. id- jamrpublication@gmail.com Page 9 9

2 Aroon Up = [No. of periods No. of periods since the highest high price] / No. of periods X 100 Aroon Down = No. of periods No. of periods since the lowest low price] / No. of periods X 100 Aroon Indicator interpretation: The Aroon indicators oscillate above/below a centerline (50) and are bound between 0 and 100. These three levels which are taken into account for interpretation. It can be interpreted that when Down indicator is above 70 region and the Up indicator is below 30 region, the market is likely to move downwards. Conversely, when the Up indicator is above 70 region line and the Down indicator is below 30 region, the market is likely to upwards. Furthermore, while Up and Down indicator run towards the centerline (that is 50), then the market is likely to enter into consolidation period. By varying the period length, the Aroon indicator can give long-term indications of trend or short-term indications of the trend. As a rule of thumb, the maximum days for the Aroon indicator is 25 but a shorter time frame can be 10. Data collection and Analysis The closing price of Axis Bank Pvt. Ltd has been obtained from the National Stock Exchange website. 60 days historical prices have been taken for analysis to predict or identify the markettrend. The table showing the Up, Down and Aroon Indicator calculations of Axis Bank Pvt. Ltd Date from the period 16 th of May 2017 to 10 th November 2017 (122 days) Up Down Aroon Indicator Date Up Down Aroon Indicator id- jamrpublication@gmail.com Page 10 10

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4 Being 25-days Aroon Oscillator, Up, Down and Aroon Indicator value can be obtained from 25 th days onwards only. Hence, first 24 days ( ) are not shown in the table calculation. Aroon oscillator movement (Market uptrend) can be found in the first chart shown below and Aroon Up & Down lines (consolidation period and market uptrend) movement can be seen in the 2 nd chart Aroon Oscilliator - Axis Bank Up and Down - Axis Bank Consolidation period Jun Jul Aug Sep Oct Nov-17 Interpretation Uptrend: In the second chart, the line that starts from 100 is called Arron-Up line and the line starts from 10 is called Down line. These are the two up-and-down lines which are used to predict the market trends. Downtrend: When Up lies above 70 and Down lies below 30, it indicates market uptrend. During the period to , the Up indicator was id- jamrpublication@gmail.com Page 12 12

5 above 70 line and the market trended upwards strongly. Likewise, when Down lies above 70 and Up lies below 30, it indicates a market downtrend. During the period, to , the Arron-Down indicator was above 70 line which signaled that the market trended downwards. Parallel Movement/Consolidation period When Up and down indicators run parallel to or below the middle line that is 50, the market entered into consolidation period. It can also be noted that consistent readings below 50 line is a sign of flat trading. Generally, consolidation is usually forming when both Up and Down move lower in parallel fashion and the distance between the two lines is quite small. This narrow parallel decline signifies that some sort of trading range is likely toform. Conclusion: It can be concluded that the Aroon indicator is a powerful tool that one has to keep in one s mind while trading n stock market. It can be perceived as a visual representation of price movements that one can easily figure out to make a prudent stock market investment decision. The oscillator would be positive when Up is stronger than Down and vice versa. The Aroon Oscillator has to be used in conjunction with other aspects of technical analysis, such as chart pattern analysis or momentum indicators. References: 1. Pring Martin J. (1991): Technical Analysis, Explained The Successful Investors Guide to Spotting Investment Trends and Turning Points, McGraw Hill, Wilder, J.W. New Concepts in Technical Trading Systems. Greensboro, NC: Hunter Publishing Company, ɪɪ Technical Indicators Glossary, CMC markets, version 1, 2008,Canada 4. A Time Price Oscillator, Stocks & Commodities V13 ( ): The Time Price Oscillator by Tushar S. Chande Simple Technical Indicators: That Really Work, Mark Larson, John Wiley & Sons. Inc,Canada 6. Technical Market Indicators, Second Edition, Robert W. Colby, McGraw Hill Professional, 12-Nov Technical Indicators for Stock Selection, Michael C Thomsett, Press Delivery Elements, The Financial Times 8. Technical Markets Indicators: Analysis & Performance, Richard J. Bauer, Julie R.Dahlquist 9. Technical Analysis for Direct Access Trading: A Guide to Charts, Indicators, Rafael id- jamrpublication@gmail.com Page 13 13

6 Romeu, Umar Serajuddin 10. Momentum, Direction, and Divergence, William Blau, John Wiley & Sons. Inc, Canada,1995 Websites: id- Page 14 14