ACE 427 Spring 2013 11... · Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle...
Transcript of ACE 427 Spring 2013 11... · Principles and Strategies, Second Edition, Prentice Hall: Upper Saddle...
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ACE 427, University of Illinois 11-1
ACE 427
Spring 2013
Lecture 11
Technical Analysis by
Professor Scott H. Irwin
Required Reading: “Technical Analysis.” Wikipedia. [http://en.wikipedia.org/wiki/Technical_analysis]
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)
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ACE 427, University of Illinois 11-2
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
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ACE 427, University of Illinois 11-3
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 ______________
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ACE 427, University of Illinois 11-4
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
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ACE 427, University of Illinois 11-5
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
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ACE 427, University of Illinois 11-6
Charting
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ACE 427, University of Illinois 11-7
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ACE 427, University of Illinois 11-8
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ACE 427, University of Illinois 11-9
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ACE 427, University of Illinois 11-10
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ACE 427, University of Illinois 11-11
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ACE 427, University of Illinois 11-12
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ACE 427, University of Illinois 11-13
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ACE 427, University of Illinois 11-14
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ACE 427, University of Illinois 11-15
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ACE 427, University of Illinois 11-16
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ACE 427, University of Illinois 11-17
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ACE 427, University of Illinois 11-18
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ACE 427, University of Illinois 11-19
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ACE 427, University of Illinois 11-20
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ACE 427, University of Illinois 11-21
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ACE 427, University of Illinois 11-22
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ACE 427, University of Illinois 11-23
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ACE 427, University of Illinois 11-24
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ACE 427, University of Illinois 11-25
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ACE 427, University of Illinois 11-26
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ACE 427, University of Illinois 11-27
Overbought/Oversold Indicators
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ACE 427, University of Illinois 11-28
Positive NegativeClosing Price Price Price
Price Day Change Change ChangeSX04 4/2/2004 784.5SX04 4/5/2004 782.5 1 -2 2SX04 4/6/2004 779 2 -3.5 3.5SX04 4/7/2004 786 3 7 7 SX04 4/8/2004 778.5 4 -7.5 7.5SX04 4/12/2004 752 5 -26.5 26.5SX04 4/13/2004 738 6 -14 14SX04 4/14/2004 765.5 7 27.5 27.5 SX04 4/15/2004 717 8 -48.5 48.5SX04 4/16/2004 732.5 9 15.5 15.5 SX04 4/19/2004 735.25 10 2.75 2.75 SX04 4/20/2004 734.75 11 -0.5 0.5SX04 4/21/2004 721 12 -13.75 13.75SX04 4/22/2004 734.5 13 13.5 13.5 SX04 4/23/2004 739.75 14 5.25 5.25
5.1 8.3 13.4
0.38RSI 38
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ACE 427, University of Illinois 11-29
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
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ACE 427, University of Illinois 11-30
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 ________________
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ACE 427, University of Illinois 11-31
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
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ACE 427, University of Illinois 11-32
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ACE 427, University of Illinois 11-33
Literally thousands of technical trading systems!
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ACE 427, University of Illinois 11-34
Market Efficiency Nothing more than the application of ___________ competition to the determination of ____ over _____ Key: With sufficient competition, price in an efficient market will never be higher or lower than the “true” equilibrium value Two sources of _____________ in efficient markets: 1. Temporary Small, short-term price movements due to
________ supply-demand __________ between buyers and sellers
_________ effect through time
Occurs over very _____ time intervals, typically
by the minute or, at most, the hour
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ACE 427, University of Illinois 11-35
2. New information
New data on ________________ factors, such as crop size, exports, etc.
New information changes ___________ price
_______________ in content, timing and importance
If it is not unpredictable, then it _____ be ____
information!
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ACE 427, University of Illinois 11-36
Bottom Line: Equilibrium price is a _____________ because market information changes
Prices respond __________ to bullish new information
Prices respond __________ to bearish new
information
Arrival of new information must be ______, if not, information is not new
Implies ____________ must be ________
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ACE 427, University of Illinois 11-37
Coin Flipping Experiment
1. Start graph at $5.00/bu.
2. Flip coin one time
heads: daily high up 10 cents from previous close
tails: daily low down 10 cents from previous
close
3. Setting the close
heads: market closes at high of daily range tails: market closes at low of daily range
4. Generate 30 “days” (one flip/day)
Fun with random numbers: http://www.dartmouth.edu/~chance/teaching_aids/books_articles/probability_book/bookapplets/chapter1/HTSimulation/HTSimulation.html
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ACE 427, University of Illinois 11-38
Random Walks and Commodity Prices Price _______ in an efficient market from day to day are __________
Behave as if generated by ____________
Called a ___________ by statisticians
Analogy to the path of a drunk walking home from a bar (I am not making that up!)
After the fact, _______ and ____________ may appear
No _______ power whatsoever
Purely _______ information
Similar to “patterns” in ____________
Outcome of a ______________
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ACE 427, University of Illinois 11-39
A Warning
Do not interpret the coin-flipping exercise as proving that commodity prices follow a random walk and that technical analysis is worthless
Market efficiency is a theory that may or may
not describe the movement of actual prices Technical analysts respond Two ____________ explanations usually offered in defense of technical analysis:
Works because so many people _____
Works because it takes advantage of natural __________________ in people (e.g. waves of irrational optimism and pessimism)
More _______ explanations have been offered in the finance and economics literature in recent years
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ACE 427, University of Illinois 11-40
Price may adjust ________ to ______________ due to:
Noise Market frictions Market power Trader sentiments Herding behavior Chaotic dynamics
____________________ allows technical methods to profit