This the general trends. In an uptrend or

This chapter refers to the literature referred for the
analysis of the research study from various research papers, Journals, online
articles and books from different sources. Currently, a lot of work has been
done which focuses technical analysis as well as on Machine Learning algorithms
for analyzing stock pricing patterns and predicting stock prices. Many stock
traders rely on Smart/Intelligent trading systems which helps in prediction
based on different situations. Some of the literature related to research is
summarized below:

 

Technical
Analysis:

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Technical analysis is
often referred as study of financial market movements. People evaluating the
financial market performance are generally termed as Technicians. They uses
historical prices along with its volume often depicted in terms of graphical
representation to make future based market decisions. Over decades, these
technicians have found many sophisticated formulas which help in simplifying
decisions. These representations are generally termed as technical indicators.

The main indicators which
are incorporated in this research report are:

RSI (Relative
Strength Index)

The Relative Strength Index
(RSI) is momentum oscillator that measures the speed and the change of price
movements. The RSI oscillates between a scale of zero and 100. Conventionally
the RSI is considered overbought when its value is above 70 and oversold when
below 30.  But its value varies based on
the different sectors. This indicator can be used to seek the general trends.

In an uptrend or bull
market, the RSI tends to remain in the 40 to 90 (varies from industry to
industry) range with the 40-50 level acting as support. During a downtrend or
bear market the RSI inclines between the 10 to 60 ranges with the 50-60 zone
acting as resistance. These ranges will vary depending on the RSI settings and the
strength of the security’s or market’s underlying trend.

If fundamental prices make a
new high or low that isn’t backed by the RSI, this divergence can signal a
price reversal. If the trading signal in RSI moves towards a lower high
followed by a downside move below the previous low a top swing failure emerges
similarly if RSI makes a higher low followed by an upside move above its
previous high a Botton Swing Failure emerges in that situation.

The RSI is a fairly simple
formula, but is difficult to explain without pages of examples. Refer to
Wilder’s book for additional calculation information. The basic formula is:

RSI
= 100 – 100 / (1 + (Average of Upward Price Change / Average of Downward Price
Change))

 

ii)  MACD (Moving Average
Convergence Divergence)

Moving average
convergence divergence (MACD) is a momentum indicator that displays the
relationship between two moving averages of prices. The indicator is calculated
by subtracting the 26-dayEMA (Exponential Moving Average) from 12-day EMA. A
nine-day EMA known as “signal line”, is plotted on top of the MACD,
functioning as a trigger for buy and sell signals. When the MACD is
above zero level and the short-term average is above the long-term average, it
represents an upward momentum. The opposite is true when the MACD is below
zero.

When the MACD falls below the signal line, it
represents a bearish trend signal, which indicates that it may be right time to
sell. Conversely, when the MACD rises above the signal line, the indicator
gives a bullish signal, which suggests that the price of the asset is likely to
experience upward momentum.

When MACD rises sharply the shorter moving
averages pull far from the long term moving averages representing a sign of
overbought condition of that security.

It is often desirable to watch for move above
and below zero line so to get a clear picture of the signals position
representing whether short term or long term averages.

 

Formula for calculating MACD is;

 

MACD =
EMA (12) –EMA (26)

Signal =
EMA (MACD, 9)

Histogram
= MACD – Signal

 

i)            
MA
(Moving Average)

A moving average (MA) is a trend-following or
a lagging indicator which is typically used in identifying the direction
of the trends and in determining the support and resistance levels because it
is based on past price movements. The two basic and commonly used MAs are

Simple Moving Average; It is a simple
average of a security over a defined number of time periods,

Exponential Moving Average; It gives more
weight age to more recent prices.