Examination Of The Profitability Of Technical Analysis Based On Moving Average Strategies In Brics

Fundamental analysis also takes into account an asset’s overall impact on the economy, or the political issues facing the region in which the asset is derived. Fundamental analysis tells analysts if an asset is viable in the long term in the overall financial world, while technical analysis is used to understand short- and long-term price movements. One of the most helpful tools a trader can use when performing technical analysis is to watch for certain patterns to appear on price charts before taking a position. Using trend lines, technical analysis can draw triangles and other geometric shapes on price charts. Technical analysis gains popularity among those who believe the financial statements may not all information about a company. On the other hand, they feel that the price resembles all the relevant information.

Stockstotrade.com needs to review the security of your connection before proceeding. PrimeXBT Trading Services LLC is incorporated in St. Vincent and the Grenadines as an operating subsidiary within the PrimeXBT group of companies. PrimeXBT Trading Services LLC is not required to hold any financial services license or authorization in St. Vincent and the Grenadines to offer its products and services. These trendlines also represent helpful guides for where a trader or investor may be interested in opening or exiting a position to maximize gain and minimize risk. It contains information such as the high, low, opening and closing price of various time frames.

Why Do You Need To Know The Difference Between Fundamental Vs Technical Analysis?

In previous research, findings about the profitability of technical analysis were quite inconsistent when applied to the stock markets of emerging countries. In general, the simple moving average or exponential moving average strategies assured a positive return, but the return was not sustained when transaction costs were considered, such as fees paid to the broker (Brock et al. 1992). This study also contributed to the evidence that market age is directly related to market efficiency, as suggested by Chong et al. .

In general, buy and hold is a more profitable and risk-free alternative to an automated strategy for most emerging markets. This procedure eliminated the impact of any nominal exchange rate and inflation fluctuations on transactions. These results showed the weakness of moving average techniques in predicting price behavior.

Also, the authors concluded that TA’s positive results for asset markets were subject to data manipulation problems and the creation of ex-post strategies. In this paper, we investigated the profitability of technical analysis as applied to the stock markets of the BRICS member nations. In addition, we searched for evidence that technical analysis and fundamental analysis can complement each other in these markets. The Differences Between Fundamental and Technical Analysis To implement this research, we created a comprehensive portfolio containing the assets traded in the markets of each BRICS member. We developed an automated trading system that simulated transactions in this portfolio using technical analysis techniques. Our assessment updated the findings of previous research by including more recent data and adding South Africa, the latest member included in BRICS.

Develop A Plan Before Taking A Position

If an asset trades within one of these patterns, detailed statistical analysis has been performed that suggests certain patterns will break in one direction over another, providing traders who spot such patterns an advantage in the market. Oftentimes, an asset will break down or up, but volume doesn’t follow, suggesting buyers or sellers are hesitant and uncomfortable with taking an actionable position. However, if the same movement occurs with strong volume, chances are that much higher for the move to be valid, and not result in a fakeout. Trendlines often rise and fall, and represent diagonal support or resistance. Horizontal resistance or support are often prices that represent a historic level or are a significant rounded number. A trend line typically is required to have multiple touches to be considered valid, and traders are recommended to watch for a break and close above or below trend lines, before taking any action.

According to Stanković et al. , TA is a way of detecting trends in asset prices based on the premise that the price series moves according to investors’ perceived standards. Their study demonstrated that the duration of these standards is sufficient for the investor to make above-average profits, even if the investments incur transaction costs. Based on this context, the objective of this paper was to investigate the profitability of moving average trading strategies in the stock markets of BRICS countries. Concerning the influence of technical analysis on fundamental analysis, Almujamed et al. (2013, pp. 57–58) studied data for Kuwait. They concluded that investors check a firm’s profitability before looking at the stock chart movements and stock price trends of the company. Furthermore, they asserted that fundamental analysis that uses a more recent series of prices, usually within five years, is employed more commonly by investors in developed markets, while emerging markets are considered inefficient.

Nison (1991, pp. 8–11) added the psychological and emotional components of the rational agents to the study of asset prices in the financial market. This approach was capable of capturing the animal spirits spoken about by Keynes , a concept that is not incorporated in fundamental analysis. Nison suggested that the study of technical analysis is important because it provides an understanding of why the market moves. The author emphasized that great negotiators make their decisions based on technical indicators. Both the previous price and the influence exercised by leaders over the decisions of other investors are factors that determine the price movement itself. In comparison to TA, fundamental analysis is focused on the economic and financial aspects of stocks and the markets.

Our results showed that the returns obtained by the automated system, on average, exceeded the value invested. There were groups of assets from each country that performed well above the portfolio average, surpassing the returns obtained using a buy and hold strategy. We also found that technical analysis can help fundamental analysis identify the most dynamic companies in the stock market. In addition, our study suggests that technical analysis and fundamental analysis can complement each other. We proposed that TA could foster the search for groups of companies listed on the stock market that have a dynamic level of capitalization and present a strong profit opportunity for investors. For this portion of our work, we analyzed combinations of moving averages that were persistently profitable within the BRICS markets.

Fundamental Vs Technical Analysis: After 15 Years In The Market!

However, trendlines can also be used to help a trader make a decision even before the trendline has been breached and is no longer valid. Using a few basic principles and tools, anyone can learn technical analysis and in no time become an expert themselves. Familiarizing oneself with the meaning of the below terms will be an important first step. The technological advancement in recent decades has also made technical analysis available to wider audiences. PrimeXBT products are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how these products work and whether you can afford to take the high risk of losing your money.

These emotions lead to repeating patterns on price charts, that if spotted well enough in advance, can tip a trader off as to how the price action may unfold. Everything from an explanation of trendlines, candlesticks, chart patterns, and more are included, as well as a comparison between fundamental and technical analysis that should remove any lingering confusion. Due to its ability to “time the market,” technical analysis is commonly used for trading purpose.

• You have now understood the importance of choosing the right strategy to enter the financial market.
• The latter included the specification of the moving average type, the range of each MA, and the initial capital to be applied.
• The goal of our research was to investigate the profitability of trading strategies based on TA in the stock markets of BRICS countries.
• Technical analysis can be performed on any type of asset, traditional, such as commodities, forex, stock indices, and more, as well as digital assets such as Bitcoin and other cryptocurrencies.
• Indicators include the Relative Strength Index , the Moving Average Convergence Divergence , and the Average Directional Index , among others.
• We will then compute various financial ratios to determine whether it is worth investing in a particular company.
• Volume typically proceeds price action, and keen-eyed technical analysts can often spot trend changes in the price of an asset by watching trading volume.

Another area for future research is analysis of the role played by small cap assets in the performance of moving average strategies in emerging markets. Our findings indicated further that even though the sample countries are classified as emerging, and they are part of the same economic group, their respective stock markets are not necessarily close to each other in terms of their behavior. This conclusion is based on the difficulty identifying a single combination of moving averages common to all the countries analyzed that could generate a consistent return.

For example, we assumed that the stocks had high liquidity, and that transactions could be traded at specific market prices. Nonetheless, the results indicated that our automated trading system, using technical analysis, could surpass the profitability of a buy and hold strategy for a small portion of the traded assets, calculated by country. Although small, this portion presented returns well above the amount invested, because the gains were from assets related to dynamic companies in the stock market. Results for India and Russia indicated higher returns, but our study did not focus on potential explanations for the different results among the countries. TA explores information from past data only, without consideration of macro or micro elements that could explain the future price behavior of specific stocks. Consequently, the results of the analysis indicated potential violations of the weak form of market efficiency, but could not be used to explain potential fundamental rationales for the profitability of trading strategies.

Indicators

Technical analysis varies greatly from fundamental analysis, but both are extremely important and helpful tools for traders to use when considering investing or taking a trade position in any financial asset. Fractals are repeating patterns that play out on price charts, oftentimes on increasingly lower timeframes. Fractals add validity and credence to the idea that markets are cyclical, and each cycle is a direct impact of the emotional state of traders.

According to Murphy (1999, pp. 1–2), graphs are the primary instruments of TA. The graphs reflect indicators, such as moving averages and oscillators, that allow analysts to detect trends, identify points of inflection in the price movement, and track capital inflows and outflows. Our findings demonstrated the feasibility and value of applying technical analysis in this context. Since some assets performed very well, they covered the losses incurred by other low-performing assets. However, few combinations of moving averages were able to outperform the returns from a buy and hold strategy.

An investor may then decide to buy and wait for the price to correct itself to $5. An investor who is holding the asset may decide to sell due to overvaluation. Among the most critical things a trader can do to improve the success rate of trades, is to completely remove emotion from their trading activities. Panic selling, FOMO-buying, or even revenge trading can all result in extreme losses if a trader’s emotional state isn’t carefully contained.

Technical Analysis: Definition, Tools & Examples

They also suggested that if transaction costs are negligible, technical analysis becomes a viable alternative, indicating that under certain conditions the markets are not efficient. Interest in these countries has been stimulated by the typical characteristics of their macroeconomic environments, such as instability, uncertainty, and inflation resulting from their adopted economic growth strategies. According to Chang et al. , emerging countries became attractive markets to investors looking for portfolio diversification and financial returns above the average attainable from the consolidated markets of developed countries. Emerging markets differ from markets in developing countries insofar as they are closer to the markets of developed countries, making them more dynamic and attractive to foreign investors. On this topic, Mukherjee and Roy emphasized the relationship between instrument price fluctuations and macroeconomic particularities.

Because their stock markets are younger, efficiency may be related to market maturity, indicating that technical analysis performs well and sustains the results of Chong et al. . Moreover, in these same markets, the increase in transaction costs shifted significantly the range of the short-term MAs that were better, as presented by Tables5, 6, and 7. When short term moving averages cross below or above a longer-term moving average, the event is called either a death cross or golden cross, named for the corresponding price action that typically follows. Death crosses are bearish, and often indicate that the asset will soon fall into a downtrend, while golden crosses are bullish and represent the wealth that investors are likely to generate from the trend that follows such an occurrence. Recent empirical evidence for South Africa verified by Noakes and Rajaratnam suggested that the level of capitalization of traded assets in that country was inversely related to market inefficiency.

Gold Market, Peter Brand

In general, research indicated that it is natural for markets to become efficient, because they do not obtain significant returns from past price behavior. Thus, evidence for technical analysis in emerging markets suggested less efficiency in these countries, which might set up an attractive investment option for the foreign investor. Similar results were presented by Mitra , and Ratner and Leal when they compared the returns obtained from the generation of buy or sell signals with the returns of a static strategy such as buy and hold. The former study focused on financial assets traded in India, and found that when the short-term moving average crossed above the long-term moving average, the prices generated positive net results. However, when transaction costs were considered, this profitability did not sustain itself.

Examination Of The Profitability Of Technical Analysis Based On Moving Average Strategies In Brics

For their analysis of TA and FA, the authors ran linear regression models with explanatory variables from TA, e.g., trend and momentum indicators based on past prices. They also ran models using variables from FA, e.g., book value and earnings per share, and models using variables from both. Bettman’s findings indicated that a model with independent variables from both approaches provided better performance based on statistics such as the Akaike information criterion and likelihood ratio tests. The work of Wang et al. (2014, pp. 33) supported a similar conclusion, showing that the joint application of FA and TA reduced the risk of the investment. In a study using data from Bangladesh, Mobarek et al. proposed that the accelerated growth of the capitalization level in that country was an investment opportunity. The null hypothesis that the market is weakly efficient was rejected after verification.

According to Lui and Mole , FA turns to the microeconomic aspects of companies and to the macroeconomic fundamentals of sectors and countries — known as market fundamentals — to justify past movements and to predict fluctuations. Through the review of previous research, we also made clear that FA and TA are not mutually exclusive tools for analyzing market data, but rather explore different drivers of price behavior. In fact, some studies explored a hybrid approach using both TA and FA, e.g., Lui and Mole , Lam , and António Silva and Neves . For our research, we assumed that prices are determined by the equilibrium between the supply and demand of the asset to which they refer. Therefore, prices captures any considerations that may be brought by fundamental analysis (Nison 1991, pp. 8–11).

History Of Technical Analysis

The use of the automated trading system generated a summary of the performance of each asset in each country. Concerning the profitability of the operations, the proportion of the assets of each country was identified for each strategy. Our approach was able to surpass the profit obtained through buy and hold, which is a lower risk strategy.

Table 4 indicates that some assets could surpass the returns obtained by a risk-free strategy. The research of Costa et al. analyzed the power of technical analysis indicators for the Brazilian asset market. The authors concluded that technical analysis has weak predictive power whether or not brokerage fees are considered. However, the use of crossing moving averages, simple or exponential, and Moving Average Convergence Divergence provided a high probability of guaranteeing a return greater than the amount invested.

The ease of using a chart to forecast future price is the main reason for its popularity. As the chart contains all the information required for decision making, https://xcritical.com/ technical analysis may appear to be easier to put into practice. As I have shared in an article oninvestment, there are four steps in successful investing.