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Research on Technical Analysis of Predicting Stock Markets

   

Added on  2020-05-04

33 Pages6669 Words192 Views
Technical Analysis of Predicting Stock Markets 1Technical Analysis of Predicting Stock MarketsTerm PaperNovember 5, 20175000 wordsNameUniversity

Technical Analysis of Predicting Stock Markets 2Abstract Predicting and analyzing the stock market is a field that most people are not aware of.Knowing when and where to invest pose a great challenge to investors and traders who wouldwant to make profits out of the stock market. However, their negligence is not to blame as thestock market is described to be very fluid and unpredictable both in long and short terminvestments.Various scholars have over the years come to find out ways that can be used to predictthe stock market in the hopes of attracting more traders and investors in the stock market aswell as making it easy to know if a stock will make profits or losses in the near or far future.Nevertheless, the stock market is still very fluid meaning that it can change with theslightest economic shifts or changes. Stock analysts use statistics, audit and financial reportsto create a pattern that can be used in determining a stock movement. Investing in the stockmarket can create very good profits for an investor but the challenge comes in deciding whichstock is the best to invest in.This research seeks to understand the stock market and analyze different stockanalysis tools and its effectiveness in predicting stock movements and ultimately, predictingif it is the right time to buy, sell, or hold stock. The research will focus on Muscat SecuritiesMarket (MSM), a stock market company operating in Oman in analyzing some companieslisted under it.The aim of the research is to ultimately find out if technical analysis of the stockmarket makes a difference in predicting stock and in helping an investor who wants to investin a certain company.Key Words Used:Stock market- a collection of markets comprising of buyers and sellers where the issuingand exchange of bonds and equities, mostly in the form of stocks or shares, takes placeShares- are units in a corporation or financial asset that provide for equal distribution inprofits

Technical Analysis of Predicting Stock Markets 3Stock- is a security that signifies ownership in a corporation or a claim in the corporation’sprofits.Technical analysis- is a tool used in trading to evaluate shares and securities where statisticaldata is analyzed with the aim of being able to predict their future movement.Technical analyst- is an individual who analyzes investments and stock market trends aswell as statistical data with the aim of being able to predict the future movement of stockmarkets.Investor- an individual who commits capital with the expectation of future returns.Index- is a benchmark that is used as a reference marker for traders in a stock market.Margin- is an account that allows an individual to borrow money or get a loan from a brokerto purchase a stock or share in a stock market.Moving average- is a stock’s average price per share during a period of time for example, 20days, 50 days. IntroductionThe stock market is a collection of markets comprising of buyers and sellers wherethe issuing and exchange of bonds and equities, mostly in the form of stocks or shares, takesplace[ CITATION The17 \l 1033 ]. Also referred to as the share market, the stock market is avital component of the market as it enables companies and businesses source for capital, aswell as dealing with inflation in exchange for giving the investors (those who buy the shares)a piece of the company’s ownership[ CITATION Ric98 \l 1033 ].For companies to attract investors, they place their shares on the stock market wherethey are listed. Stocks can be categorized in various ways one of them being based on theCountry where the company is located. For example, if a company is located in the United

Technical Analysis of Predicting Stock Markets 4States of America, it is listed on the US stock exchange. This, however, does not confine thecompany from trading with other countries beyond its country’s borders. Despite its importance in the sustainability of a company, stocks are quite often veryunpredictable[CITATION Fab14 \l 1033 ]. They can change in value any time depending onthe market forces, and this discourages investors. Technical analysts of stock markets,therefore, play the role of trying to predict the future value of the stock of a particularcompany based on past data on the company.Analyzing the value of stock majorly depends on statistics; analysts go throughfinancial audit reports, profit and loss statements, balance sheets, any other financial recordsof the company, as well as the policies of the company[ CITATION Rob13 \l 1033 ]. Withthis information they can draw patterns, charts, and graphs which they use to predict thefuture of the company worth in the stock markets. Besides this, the technical analysts alsoanalyze sales data, competition, managerial capacities, the capacity of the company, treasuryreports, production indexes, price statistics among other data. It starts with observing thetrend and a rising trend is a good sign.Technical analysts are vital in deciding if it is the right time to sell, buy orhold[ CITATION Mic10 \l 1033 ]. However, nothing is always certain, as dictating if andwhen stocks will go up and down is very difficult and all that analysts can do is predict aprobability. In addition to knowing the risks that surround stock exchange, technical analystshelp put more confidence in investors to buy shares.In technical analysis, there are three assumptions that are made; first, the marketdiscounts everything this is because technical analysts consider only the price movementciting that the stock price is a direct reflection of all the factors that affect a company.Secondly, technical analysts believe that price moves in trends thus after establishing a

Technical Analysis of Predicting Stock Markets 5particular trend the likelihood of future price movement will be the same. Thirdly, in mostcases, history tends to repeat itself in regards to price movement. This is attributed to marketpsychology where participants tend to have the same consistent response to different marketchanges[ CITATION Lar14 \l 1033 ].Unlike technical analysts, fundamental analysts study everything that affects thecompany from the overall economy of the country as well as the industry conditionssurrounding the company[ CITATION Jac95 \l 1033 ].Muscat Securities Market (MSM) is a stock exchange located and operating in Oman.It was started in 1988 and later restructured in 1998, the securities exchange, which is ownedby the government of Oman, has a listing of over 116 companies. MSM established its indexin 1990 and currently has 30 companies listed which are the most stable and therefore areused to establish the price movement as well as provide a benchmark for other individualinvestors[ CITATION MSM17 \l 1033 ].This research will, therefore, study the 30 companies listed on the MSM index andanalyze their profitability and security investment-wise with the help of technical analysis.Objectives of the Research1.To determine better ways that will give investors more confidence in investing 2.To analyze securities of companies listed on the MSM security index3.To implement the knowledge of technical analysis in knowing when to buy, sell orhold stockResearch Questions1.Why is technical analysis important in the stock market?

Technical Analysis of Predicting Stock Markets 62.How can technical analysis be used to measure the security of a company an investoris interested in?3.How can technical analysis be used in future in helping investors in making the rightdecisions when they want to invest in stocks?Rationale of the StudyThe objective of this study is to analyze the various types of technical analysis toolsand understand the role that it plays in stock exchange. The study will analyze technicalanalysis as a tool that can be used by companies and investors in predicting the future of acompany in relation to its shares and the value it holds. The Stock exchange is a platformwhere all parties can have a win-win. Using technical analysis will help investors knowwhich companies are good to invest which will ultimately create money for them as wellthrough profits as provide capital to companies being invested on.Technical analysis is just not observations and drawing of conclusions. Literature Review The use of technical analysis in predicting stock markets has received its share ofcriticism over the years with authors like Lo and Hasanhodzic citing that the process is basedon intuition and deserves more academic study[CITATION And111 \l 1033 ]. In their book,they further continue to state that qualitative analysis is a much stronger method as it is basedon statistics as opposed to technical analysis which is to a great extent a probability.Technical analysis focuses on occurrences that have taken place before and have tended torepeat over the years. This then creates a trend that analysts use to predict future stock prices.Analysts and experts consider ‘analysis’ is a scientific process and thus it shouldfollow scientific procedures of collecting data, doing calculations to produce undoubted and

Technical Analysis of Predicting Stock Markets 7proven results. However, technical analysis is not known for using scientific procedure. Atechnical analyst will observe a graph and decide there if the stock is rising or falling and if itis the best time to sell or buy. It has zero scientific value [ CITATION FSC15 \l 1033 ] hencethe source of its criticism.Despite that, its importance still cannot be ignored. Technical analysis can still andhas in the past given useful predictions on the stock market. Besides carrying out scientificresearch and calculations, observing the market trends and behavior can give a hint on wherethe market is headed. In cases of depression, there is no need for scientific research the graphcan tell it all. Technical analysis helps investors be aware of the market forces and the factorsthat affect the stock markets such as politics, imports, and exports among others.Charles Kirkpatrick and Julie Dahlquist in their book categorize technical analysis asmore of a short-term plan used by traders rather than long-term suitable forinvestors[CITATION Cha10 \l 1033 ]. For short-term traders changes or announcements bythe company doesn’t affect them much since these changes do not take place minute byminute or day by day but rather takes a process for these changes to be felt on the ground.However, for long-term investors, technical analysis is not quite suitable.A short-term trader, therefore, relies more on a technical analyst since they need to beaware of market price behavior and its interpretation which is either should I buy, should Isell or should I hold?However, for technical analysis to work almost precisely, various tools must be usedon the same test subject to validate the observations. For example, in analyzing a company ifit is secured for investment in the stock market, technical analysts may use Relative StrengthIndex as well as Moving Average Convergence Divergence together to validate thefindings[ CITATION Nup17 \l 1033 ].

Technical Analysis of Predicting Stock Markets 8Even with the use of multiple tools, some experts believe that technical analysisthrows people off and often give the wrong information to investors[ CITATION Jon15 \l1033 ]. Both technical analysis and fundamental analysis can be used to complement eachother. A technical analyst can highlight a certain market price change, establish a trend andthis trend is then picked up by a fundamental analyst who then does a scientific research toattain a long-term investment solution.Another criticism comes to play when all players in the market practice and followtechnical analysis meaning that to avoid a fail in the stock market previous mistakes shouldbe avoided thus the role of technical analysis becomes futile.In a report done by Cheol-Ho Park and Scott Irwin in 2003 revealed that 30-40 percent of those who use technical analysis regarded it as a significant tool in determining andhighlighting price movement for up to six months[ CITATION Par04 \l 1033 ]. However,there is need to explore the deficiencies that technical analysis has and find solutions to themto make the tool more profitable to investors.With new emerging technologies such as computers, the verification of data andconclusions drawn by technical analysis has improved. Now computers are being used to keyin data, monitor trends, and automate the entire process giving more authenticity to the resultsconcluded[CITATION Gor16 \l 1033 ].Technical analysis is deeply rooted in human behavior; it observes how investorsreact the same way to the same events over and over[ CITATION Mic09 \l 1033 ]. Forexample, during political elections especially in regions where there is conflict or tensions ina country, the stock markets do not perform as well as they should. Most market prices dropsignificantly or remain stagnant. This is a behavior that has been observed over the years andtherefore, will most likely take place in future elections.

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