An Empirical Study on Nifty Stocks by applying ADX and ......Fundamental analysis means financial...

S.S.M. Journal of Science and Humanities

ISSN-2456-8767

Issue –I, Nov 2016

84

An Empirical Study on Nifty Stocks by applying ADX and Moving

Average

Sarbajit Paul*

Assistant Professor, Dept. of Commerce, Chakdaha College, Chakdaha, Nadia, W.B.

Abstract Trend identification of a stock is an important part of Technical Analysis (TA). In a short time

span whenever a trader can guess the trend of a particular stock, it is easier to him to enter into a

trade or exit from a trade. Present study focuses on the process of trend identification by using

the most popular TA indicator „Average Directional Movement Index‟ (ADX). ADX measures

the strength of the trend not the direction. High reading of ADX indicates the strong trend either

up or down side and a low reading of ADX implies the consolidation. To measure the trending or

consolidating phase of Nifty stocks and their profitability position simultaneously we have

applied ADX with a trend following 13 days moving average indicator. Secondary data have

been collected from Equal Solution (data vendor), for analyzing the data Meta-Stock 11 has been

used. Our study reveals that ADX is a powerful tool for trend identification and almost all the

Nifty stocks yield a notable return under the study period.

Key Words: Technical Analysis, Average Directional Movement Index, Moving Average

*


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Introduction

Across the globe mainly two schools of thoughts are recognized for the stock market trading and

investment. These are Fundamental Analysis (FA) and Technical analysis (TA). There are so

many tools and techniques used by the trader and investors as per their own choice for their

trading and investment, depending upon the market timings and opportunity. A number of

traders usually trade based on the news as waved by media or follows the tips provided by the

experts. Certain percentages of traders execute their trade or investment based on FA where as

some traders or investors fully or partly depend on TA. Some time it seems to be that FA and TA

different approach for trading and investment. Some time it proved these are complementary.

Fundamental analysis means financial statement analysis of an organization or extract the

intrinsic value of the share of a company and differentiate whether this price is below or above

the market price of that particular share or not. Technical analysis is a time tested mechanical

technique based on past data. (Paul & Mitra, 2013). In 17th

century first time Japanese analysts

experimented the TA on the price changes in rice. Now huge number of people and practitioners

of different financial markets admire and appreciate the usefulness of TA. Under this method a

trader or investor does not think about the company‟s financial position, company‟s brand value

or intrinsic value of the share or any corporate announcement like dividend declaration, bonus

issue but focus on the price change and volume accumulation of the share in the market place.

Actually TA means short-term price fluctuation of a financial market based on historical data.

One of the most important assumptions of TA is that price follows the trend unless and until the

trend is break. On that premise today‟s price of a particular share depends on the past price trend

of that share. Here lies the importance of Average Directional Movement Index (ADX). ADX

measures the strength of the trend. In this paper we have applied ADX for identifying the

strength of the trend along with 13 days moving average for fine tuning the entry and exit timing

of a trade. We have also assessed the trader‟s profit and loss position when a trader follows this

composition. ADX is an untrodden concept in TA, which is quite useful for the trader to locate

the price trend of a stock. It is a very powerful indicator in stock market in order to identifying


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the strength of a trend. It indicates the strength of the trend but not the direction. A high value of

ADX indicates the strong trend in both the side (up or down). Similarly a low value of ADX

defines the consolidation or range bound phase. We can measure the overall market trend as well

as the trend of a single stock by applying ADX.

Literature Survey

Yazdi, S.H.M. et. al. (2013) have experimented technical analysis in Forex market by the use of

a very popular indicator Moving Average Convergence and Divergence (MACD). They have

applied this indicator on four currencies individually e.g. EURUSD, GBPUSD, USDCHF and

USDJPY for judging the efficacy of the indicator in terms of return generated. They have

developed Virtual Historical Trading Software for the computation and using hourly data for the

period of ten years starting from January 2001 to December 2010. They found in case of

EURUSD, the indicator MACD is moderately good. MACD is relatively better in giving buy

signal in comparison to sell signal and it turns out more profitable.

Eric, D. et.al. (2009) have made a study on investment strategy optimization in financial market.

They have applied two technical analysis indicators Moving Average Convergence and

Divergence (MACD) and Relative Volatility Index (RVI) for this purpose. The main objective of

the study was to identify the most profitable parameter of both the indicators as the function of

investment strategy optimization. Their sample consists of regularly traded stock of financial

market of Republic of Serbia. They found both the indicators contributing significantly in

decision making process of profitable investment in financial market.

Wu, J.L. et.al. (2012) have studied on stock price prediction applying combine feature of

sentiment analysis and technical analysis. They argued that stock news article plays a significant

role in stock trend prediction as this information influences the investors‟ decision. They have

developed a model based on both the analysis. Sentiment analysis is based on point wise mutual

information and technical analysis is based on expert trading rules. They found their model i.e.

combination of sentiment and technical analysis of stock price prediction to be the best

performer in comparison to predicting stock price without sentiment analysis method.


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Pandya, H. (2013) has taken an initiative to organize a study on technical analysis of selected

companies of information technology sector of India. He has collected data of two financial

years ranging from 1st April, 2010 to 31

st March, 2012 for five leading IT companies e.g. HCL,

INFOSYS, MPHASIS, WIPRO and TCS. Several technical analysis tools have been applied and

a number of line chart and bar diagram have also been used for the study. In conclusion he has

stated that on the basis of technical analysis knowledge one can easily foresee the perfect

investment decision in the stock market

Ormos, M. and Vazsonyi, M. (2011) have conducted a study to identify the impact of public

news on stock market price. They have experimented on S&P500 stocks. In their study period

they have used three types of data one from companies specific headline news during 17th

December 2005 to 1st July 2009. Secondly, they have considered general economic and financial

news from 26th

October, 1997 to 9th

April, 2004 and third daily closing stock price of S&P500

companies for the period 30th

June, 1989 to 1st July, 2009. They have found 70 percent of

predictive capability for days of interest where the majority of shares in S&P500 have shown

havoc price changes on small scale. They have also stated that their approach outperform the

classical approach.

Karmakar, M. and Chakraborty, M. (2000) have made an interesting study to investigate the

monthly effect and turn-of-the month effect in Indian stock market. They have applied two

distinctive methods one is calendar day approach another is trading day approach. Sample of

their study is daily closing price of “The Economic Times Index Numbers of Ordinary Share

Prices” for the period of 15 years from January, 1981 to December, 1995. The result reveals that

both the methods are yielding significantly higher return in the first half of the month compared

to second half of the month and abnormally high return at the turn of the month. They concluded

that based on their findings two anomalies have been noticed- monthly effect and turn-of-the

month effect in the study.


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Objectives of the Study

To Measure the strength of the trend whether the market is in trending or consolidating by the

use of Average Directional Movement Index (ADX) and at the same time respective profitability

of Nifty Fifty Stocks by use of ADX along with 13 days moving average.

Data Collection and Methodology

Secondary data have been collected from Equal Solution, the data vendor. „Meta-Stock 11‟ has

been used for analyzing the data and charts. We have taken data of two months period ranging

from 01.06.2015 to 31.07.2015. Two months data may not be considered to be inadequate as the

purpose in general is to analyze market trend at a short span for earning quick profit.

We have analyzed whether market is Trading (Consolidating) or Trending and exact timing of

the trade by use of ADX.

We have applied 13 days Moving Average along with ADX to identify the strength of the trend

with specific entry and exit point and profit and loss of a trade.

Sample Companies

We have taken data of all Nifty Companies.

Why We Have Taken All These Companies

High market Capitalization

Traded in Cash Segment with high volume

High liquidity with Future segment traded stock

High weightage in Nifty with high volatility

World-wide Business operation

Bonus and dividend paying stock

Giant in their own sector and

Earning huge profit and enjoying high brand value among their peer group


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What is Trending and What is Trading or Consolidating?

“Market movements can be characterized by two distinct types of phases. In one phase,

the market shows trending movements either up or down. Trending movements have a

direction bias over a period of time.

In the second phase, the market shows trading range movements or consolidation, where

the market shows no consistent directional bias and moves between two levels.”

(Ashwani Gujral, 2007)

Trading Style

Day Trading: Trading within the day.

Swing Trading: Trading technique to catch up the swings either at uptrend or

downtrend. Duration 3 or 4 days to one or two weeks.

Positional Trading: The trader holds the trade for a few weeks to few months.

Technical Identifications

Trend Line: A trend is a rising or declining series of a stock price over a certain period of time.

Different Market Phases

Repeated higher closing price creates the uptrend and a series of lower closing prices indicates

the downtrend. An uptrend is revealed if the price of a stock touches the higher prices

consistently and we follow the reverse scenario in case of down trend. Unless and until the trend

is broken it is assumed that the price follows the same direction. Range-bound market means

where no consistence direction of price movement and price moves in a certain range

(consolidation).

What is ADX and Usefulness of ADX

In 1978 J. Wells Wilder developed and explained the model of ADX in his very popular book

„New Concepts in Technical Trading Systems‟ for smooth trading in both the market situation.


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Average Directional Movement Index (ADX) helps us to identify whether the market is trading

(Consolidation) or trending .ADX defines the strength of the trend not the direction.

The most important feature of ADX is it informs us whether we are in a trend or not and also the

degree of strength of the trend. If we are in a trending phase we have to use trend following

indicator like MACD, Moving Averages or if we are in a Range-Bound (Consolidation) phase

we have to use oscillator like Relative strength Index (RSI).

“When the ADX starts rising from a low level it signals the beginning of a trend and the trend is

confirmed when the ADX has risen above the 20-25 value and the +DMI value has crossed the –

DMI line in case of uptrend. When the ADX has reached an overbought level of 40-50 and starts

consolidating or turning down it can signals the end of the current trend. The decline of the ADX

signals the consolidation or indecision of the

market.”(http://www.forexmt4.com/_MT4_Systems%20Documentation/1%20ADX%20Indicato

r.pdf)

Generally market movement follows two phases one is trending and other is consolidation. In

trending condition market has upward or downward bias. In consolidation phase market shows

the range-bound or sideways movement. It is important to identify the market phase. ADX helps

us to identify whether market is trending or trading (consolidating). ADX informs us whether we

are in the trend or not. If we are in a trend then it becomes imperative to measure the degree of

strength. In trending market, ADX keeps us in the trade and we easily accumulate profit by using

trend following indicator like MACD or any other moving averages. In the consolidation phase

ADX helps us to underwrite Call or Put option to take the advantages of time killing benefits.

Steps for Calculating ADX

In order to calculate ADX one must follow the sequence

Identify the Directional Movement (Today‟s Range-Yesterday‟s Range); Range= High-

Low


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Find out True Range and take the largest of the following three: (I) Diff. of Today‟s High

and Low (II) Diff. of Today‟s High and Yesterday‟s Close and (III) Diff. of Today‟s

Low and Yesterday‟s Close

Find out the +DI and –DI : +DI=+DM/TR and –DI=-DM/TR, and smoothing them with

Moving Average

Identify the DX : DX={+DI14-(-DI14)/+DI14+(-DI14)}*100

Now finally ADX is obtain by smoothing DX with 14 Days EMA

ADX Calculation

(Source:http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directiona

l_index_adx)

Graphical Representation of ADX


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Graphical Representation of ADX on ABAN Offshore


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NIFTY and its various Trading Phases


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ADX and MA Buy Signal of BOSCH

Findings

Profit from Nifty Fifty stocks (on single share investment) Period: 01.06.2015--31.07.2015

Name of the Script Expected

Profit

Name of the Script Expected

Profit

ACC Ltd. 99

Hindalco Industries Ltd. 7

Adani Ports 0

Hindustan Unilever Ltd. 117

Ambuja Cements Ltd. 29

HDFC 171


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Asian Paints Ltd. 141

I T C Ltd. 31

Axis Bank Ltd. 29

ICICI Bank Ltd. 27

Bajaj Auto Ltd. 405

Idea Cellular Ltd. 12

Bank of Baroda 22

IndusInd Bank Ltd. 151

Bharat Heavy Electricals

Ltd.

40

Infosys Ltd.

164

Bharat Petroleum

Corporation Ltd.

175

Kotak Mahindra Bank Ltd.

0

Bharti Airtel Ltd. 47

Larsen & Toubro Ltd. 203

Bosch Ltd. 3209

Lupin Ltd. 181

Cairn India Ltd. 2

Mahindra & Mahindra Ltd. 140

Cipla Ltd. 97

Maruti Suzuki India Ltd. 570

Coal India Ltd. 37

NTPC Ltd. 4

Dr. Reddy's Laboratories

Ltd.

680

Oil & Natural Gas Corporation Ltd.

8

GAIL (India) Ltd.

26 Power Grid Corporation of India

Ltd.

0

Grasim Industries Ltd. 390

Punjab National Bank 5

HCL Technologies Ltd. 56

Reliance Industries Ltd. 176

HDFC Bank Ltd. 105

State Bank of India 14

Hero MotoCorp Ltd. 173 Sun Pharmaceutical Industries Ltd 109

Tata Consultancy Services Ltd.

76 UltraTech Cement Ltd.

541

Tata Motors Ltd.

11 Vedanta Ltd.

0

Tata Power Co. Ltd.

3 Wipro Ltd.

48


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Tata Steel Ltd. 10 Yes Bank Ltd.

69

Tech Mahindra Ltd. 47 Zee Entertainment Enterprises Ltd.

129

(Source: Author‟s Calculation)

Discussion

We have applied our selected method for trading in Nifty companies and got a very interesting

result. Within the study period almost all the companies except Adani port, Kotak Mahindra

Bank, Power Grid Corporation and Vedanta Ltd yield a handsome return. Bosch Ltd earned

highest return of Rs. 3209 from a single share investment and Cipla Ltd experienced the lowest

return of Rs. 2 per share of investment. The average return of total fifty companies is Rs.176 per

single share investment. So our findings exhibit the profit yielding power of the proposed

method. ADX indicator and 13 days moving average method is based on easiest calculation,

without the use of software one can apply it in his or her own trade.

Conclusions

Average Directional Movement Index (ADX) is a very simple, useful and powerful

indicator in stock trading for identifying the strength of a trend irrespective of its

direction.

We have found almost all the shares of Nifty yields handsome profit by using ADX

technique under the study period. Bosch Ltd yields Rs. 3209 which is the highest return

and Cipla Ltd yields the lowest return of Rs. 2 per share of investment. The average

returns on Nifty fifty shares are Rs. 176 per share. We have used ADX with a „trending

indicator‟ for identifying the entry and exit point.

Above all, despite its own limitation, ADX proved as a powerful tool for strength

identification of a trend along with the assured returns. Trader may apply ADX along

with some trend following indicators and a reasonable stop loss for safe investment.


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References

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http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:average_directional_index_adx

http://www.swing-trade-stocks.com/ADX-indicator.html

http://www.trendsoft.com/tasc/ADX.htm

http://www.trade2win.com/boards/technical-analysis/29092-adx-calculation.html

An Empirical Study on Nifty Stocks by applying ADX and ......Fundamental analysis means financial...

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