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Realtraders,
Here is an analytical methodology that I use to determine the nature
of the securities that I analyze and trade. At the outset, I admit
that the methodology is bit eclectic and it does not have the
required intellectual appeal. However, I have found it to be quite
helpful and profitable.
I request you to comment on this and please suggest further
refinement.
Thanks in advance for your patience to read the stuff.
Rajat K Bose
Reproduced below is the write-up:
Analytical Methodology
The analytical methodology involved in technical studies has
essentially been divided into two models—trending and non-trending or
range bound.The process followed in determining trendiness is as
follows:
1. ADX indicator—9 and 14 period one—is used. If the ADX values are
seen to be rising, the scrip is said to be in a trend. In conjunction
with this or exclusively one can use Tushar Chande's Range Action
Verifying Index.
2. A smoothed version of the statistical indicator called r-squared—of
differing time-periods—is also used. Here again, if they are found to
be rising, the scrip is said to be in a trend for the time periods
used
in those indicators.
3. Variable moving averages (VMA) of differing time periods are also
used for confirmation. I use 8 and 21 days VMA. In a trending market,
the VMA has a direction—up or down—otherwise it remains flat in a non-
trending market.
4. A band of another statistical indicator called Standard Error Band
(SEB) is also used to observe the strength of any trend in a scrip.
The stronger the trend the tighter the band. In a range bound market
the band becomes wider. Both the SEB and the r-squared indicator are
derived from linear regression analysis of time series data—here
stock prices through time.
5. Additional confirmation of bull and bear markets come from
indicators like the 14-RSI—in a bull market, this indicator does not
normally go below 40 and while in a bear market it does not normally
goabove 60.
6. Also used are Fibonacci retracement studies—38.2 per cent
retracement is normal in a correction beyond that the probability of a
trend petering out becomes greater.
Once the trend is determined and the scrip is found to be in a trend,
trend following methodology is used. Trend-following methodology
1. Tools used in trend-following methodology are primarily moving
averages and trendlines. These two tools are either used as support
and resistance levels or re-entry points depending on the case.
2. Other trend-following indicators like MACD and MACD Histogram are
also used.
3. Moving Average hi-lo channels are also used extensively.
4. Certain indicators which are otherwise used for range bound markets
are also used to predict higher or lower prices. Williams’ %R and
Stochastics are two such examples. Stochastic Pops in either the
overbought or the oversold zones are used as confirmation that a trend
is in progress and prices are likely to continue to move in the same
direction. Similarly a rising Willams’ %R in an uptrend would indicate
higher prices.
5. Stop-loss levels are determined by the break of moving averages or
trendlines or hi-lo channels.Trading or range-bound market methodology
1. If the scrip displays trading market (range bound )characteristics,
what is attempted first is to be able to determine the range in which
the security in question would move about. This is done in two ways
either by using the oscillators’ overbought and oversold readings or
by using Fibonacci retracement levels or major support and
resistancelevels.
2. In this type of market, buy weakness and sell strength strategy is
followed.
3. Stop-losses are placed beyond the levels perceived to be the
boundaries of the range.
4. Pyramiding is not advocated in this type of market.
5. Volatility study is added as a crucial factor in range-
boundmarkets.
Above all, the Weight of the Evidence approach is followed in
allcases.
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