Profitability of Oscillators Used in Technical Analysis For Financial Market
Profitability of Oscillators Used in Technical Analysis For Financial Market
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Abstract—This research paper aim to examine the profitability of movement can be predicted. Pattern analysis is very subjective
various kinds of oscillator used in technical analysis on market index analysis and its effectiveness solely depend on the skills and
of NSE (National Stock Exchange) S & P CNX Nifty 50 During 2004- experience of the person using it. On the other hand, technical
2014. We have selected the most commonly used three oscillators i.e., indicators such as moving averages or oscillators uses
Stochastic oscillator, RSI Oscillator and Commodity Channel Index
(CCI). The results clearly express that CCI outperform the remaining
mathematical formulas on the price, volume and open interest
two oscillators in terms of profitability for S&P CNX NIFTY50 Index. to generate buy and sell signals. Trading based on technical
indicators is very systematic and disciplined approach for
1. TECHNICAL ANALYSIS price prediction.
Technical analysis uses historical data for prediction of future 2. LITERATURE REVIEW
prices, for better visualization of data, it is plotted in the form
of a chart. Technical analysis is very commonly used by Menkhoff (2010) survey of fund managers clearly shows that
practitioners for forecasting on stock, commodity, and foreign technical analysis is the most important form of analysis for
exchange markets. In the academic world, profitability of forecasting for short term. For US equity market, Marshall et
technical analysis is still a myth, although a lot of research is al. (2008) study on 7846 technical trading rules tested on
done on the topic in the last two decades, but most of the SPDR (Standard & Poor’s Depositary Receipts) expressed the
research is done using the very long term historical data for opinion that technical analysis is not profitable. Tanaka-
Dow Jones Industrial Average (DJIA). Yamakawi and Tokuoka (2007), analyzed the effectiveness of
technical indicators on Tick data on eight stocks traded at
Technical analysis is based on two basis assumptions – (1) NYSE (New York Stock Exchange). The results show that
Price Discount Everything – It means that the current price of moving average based rules were convincingly profitable and
a product has all information in it, thus there is no need to combination of indicators make more accurate signals than
analysis anything else apart from price action. (2) History any individual indicator. Literature review clearly expressed a
Repeat itself – It means that prices move in trend, and same mixed opinion about the effectiveness and profitability of
trend and patterns keep on repeating itself. This is the reason technical analysis.
why pattern analysis is one of the important pillars in technical
analysis. If this assumption won't stand good, then there is no 3. OSCILLATORS
use of analyzing the historical data for future price predictions.
Oscillators are widely used as a tool of technical analysis, they
The most famous work on technical analysis is done by are popular mainly because of their leading signal generating
Murphy (1999) in his book, serving as the gold standard ability, being as leading indicators they don’t lag behind the
reference today. Various tools used in technical analysis, price action. They are most profitable in a sideways market, in
including chart construction, price patterns, various forms of contrast to trend following indicator like moving average,
moving average and the oscillator, and Dow Theory has been which is more profitable in a trending market. Oscillators take
discussed in detail in the book. Murphy also addressed the the form of lines drawn below the price plot and usually
issue of changes in technology and its increasing use in moves in a pre-defined range.
technical analysis.
Oscillators are used for generating trading signals by using the
Technical analysis can be divided into two forms (1) - direction and value of oscillators. The value of the oscillators
Pattern/Candle analysis (2) – Analysis using indicators. indicate the strength of trend. If the value of oscillator rises,
Charting involves the visual identification of patterns in the the price increases and it gains momentum. Oscillators are
historical data, on the basis of these patterns future price
also used to find out the overbought and oversold zone, if the price of a product for a period of time. Its value ranges
prices rises too quickly the oscillator reaches to a level at between 0 to 100, and like stochastic value above a certain
which it is considered overbought. Conversely, if the prices high level e.g. 80 denotes overbought area and conversely
decreases too sharply, the oscillator reaches to a level at which below 20 denotes an oversold area. Like all other oscillators,
it is considered oversold. trading signal can be generated using the direction of RSI, or
another way of generating signal is crossover of RSI with its
4. STOCHASTIC OSCILLATOR own moving average.
Stochastic Osciallator is a momentum oscillator developed by
Dr. George C. Lane in late in 1950s. It works by comparing RSI = 100 - (100/(1+ RS) )
the current price with a defined price range. Stochastic follow
the momentum and not the price, and because momentum Where:
changes its direction before a change in price, thus it gives
signal earlier than any other price following indicator. Its RS= (average daily price increase / average daily
values ranges between 0 to 100. price decrease)
Calculation
Calculation:
%K = (Current Close - Lowest Low)/(Highest Trading Rule
High - Lowest Low) * 100
Buy: Whenever RSI is greater than SMA of RSI
%D = n-day SMA of %K
Sell: Whenever RSI is less than SMA of RSI
Lowest Low = lowest low for the given period Buy to cover: Whenever RSI is greater than SMA of RSI
Highest High = highest high for the given period 7. COMMODITY CHANNEL INDEX (CCI)
%K is multiplied by 100 to move the decimal point two places Commodity Channel index was introduced by Donald
SMA is Simple Moving Average of n period Lambert in 1980.Although the name of this indicator relate it
with commodity trading, as initially it was developed for
5. THREE TYPES OF STOCHASTIC commodity trading. But now a days it is extensively used by
traders for all product types including stocks, forex and
Fast Stochastic – It is the standard stochastic with above commmodities.
formula without any modification.
Calculation
Slow Stochastic – In this variation of stochastic we use the
same lines smoothed by computing moving averages of their CCI = (price - simple moving average) / (0.015 *
values, thus it generate less number of signals for trading. standard deviation of the price)
Full Stochastic – In this type of stochastic K% is computed in
same manner as above, then we smooth the K% by calculating Trading Rule
its moving average thus getting k%(Full). At last we draw
another line D% (full), which is simple moving average of Buy: Whenever CCI is greater than 0.
k%(full) for a specific period. For our testing, we will use full Sell: Whenever CCI is less than 0.
stochastic with following trading rule.
Short Sell : Whenever CCI is less than 0.
Trading Rule
Buy to cover : Whenever CCI is greater than 0.
Buy: Whenever K%(Full) is greater than D%(full)
8. TEST RESULTS
Sell:Whenever K%(Full) is less than D%(full)
Short Sell:Whenever K%(Full) is less than D%(full) Results of Stochastic Oscillator
Buy to cover: Whenever K%(Full) is greater than D% (full) We have tested Stochastic trading rules by using every
combination with K% values from 7 to 21, D% values from 3
6. RSI (RELATIVE STRENTH INDEX) to 7 and SMA of K% with values from 3 to 7. So it concluded
with total 300 different tests for this trading rule on 11 years
RSI was developed by Welles Wilder, it is a technical of S&P CNX Nifty 50 data from 1st Jan. 2004 to 31st Dec.
indicator which calculate the rate of increase or decrease in 2014. Detail analysis is available on Table-1 for all 300 tests.
Rank Net Profit Total Trades Trade Profit/Loss Avg. Profit/ Avg.Loss K% D% MA
1 6979.10 321 158/163 1.67 21 3 3
2 6147.45 295 146/149 1.55 19 3 4
3 6112.90 325 156/169 1.63 20 3 3
4 5841.25 284 139/145 1.57 15 4 3
5 5841.25 331 159/172 1.59 17 3 3
6 5796.65 291 141/150 1.59 13 4 3
7 5718.15 335 160/175 1.58 18 3 3
8 5618.50 285 147/138 1.41 21 3 4
9 5565.40 296 143/153 1.57 12 4 3
10 5565.15 287 141/146 1.51 14 4 3
11 5473.35 331 155/176 1.61 19 3 3
12 5449.30 298 147/151 1.48 18 3 4
13 5391.95 278 135/143 1.56 21 4 3
14 5372.10 334 160/174 1.55 16 3 3
15 5310.25 300 149/151 1.45 15 3 4
16 5308.00 271 134/137 1.50 20 4 3
17 5228.75 301 149/152 1.48 7 4 3
18 5222.25 296 144/152 1.54 8 4 3
19 5186.55 273 131/142 1.57 18 4 3
20 5109.65 302 141/161 1.62 11 4 3
21 5070.20 295 142/153 1.54 9 4 3
22 4998.05 279 133/146 1.57 16 4 3
23 4984.60 296 145/151 1.45 17 3 4
24 4980.75 285 140/145 1.48 20 3 4
25 4953.55 303 140/163 1.64 10 4 3
26 4864.80 301 147/154 1.47 13 3 4
27 4847.05 329 161/168 1.45 13 3 3
28 4810.45 259 120/139 1.66 19 3 5
29 4796.55 309 158/151 1.34 9 3 4
30 4763.15 335 162/173 1.47 11 3 3
31 4735.40 277 134/143 1.49 19 4 3
32 4689.65 310 155/155 1.36 11 3 4
33 4635.00 253 122/131 1.53 20 3 5
34 4624.80 338 162/176 1.48 12 3 3
35 4622.00 304 146/158 1.48 14 3 4
36 4580.40 276 133/143 1.49 17 4 3
37 4573.10 275 143/132 1.28 7 5 3
38 4540.80 314 158/156 1.35 8 3 4
39 4516.65 245 115/130 1.58 20 4 4
40 4469.55 281 133/148 1.53 8 3 5
41 4379.10 302 152/150 1.34 12 3 4
42 4379.10 304 145/159 1.47 16 3 4
43 4334.20 332 154/178 1.53 15 3 3
44 4291.40 245 112/133 1.64 19 4 4
45 4273.80 255 127/128 1.39 7 4 5
46 4177.75 281 138/143 1.39 9 3 5
47 4157.70 254 116/138 1.60 13 4 4
48 4124.40 274 129/145 1.50 13 3 5
49 4099.95 245 114/131 1.55 21 4 4
50 4072.95 261 128/133 1.39 9 4 4
51 4036.85 245 120/125 1.41 20 6 3
52 4013.35 261 119/142 1.60 18 3 5
53 4011.90 245 120/125 1.41 21 6 3
54 4006.50 268 127/141 1.48 17 3 5
55 3998.75 339 163/176 1.41 9 3 3
the period of k% with maximum profit with a period of 21 from 3 to 7, so it concluded with total 70 different tests for this
(which is highest period in our testing range). trading rule on 11 years of S&P CNX Nifty 50 data from 1st
Jan. 2004 to 31st Dec. 2014. Detail analysis is available on
9. RESULTS OF RSI OSCILLATOR Table-2 for all 75 tests.
We have tested RSI trading rules by using every combination
with RSI Period from 7 to 21 and SMA of RSI with values
From the results it is evident that best performance of RSI is Table 3 : Results of CCI Oscillator
achieved for S&P CNX Nifty50 if values of RSI and SMA Ran Net Trad Trade Avg. Profit/Avg. CCI
period is taken as 20 and 4 respectively, generating a profit of k Profit es Profit/Loss Loss Period
7031 points, with total 390 trades, profitable trades 185, 1 7012.15 182 88/94 2.00 9
unprofitable trades 205 and thus giving an accuracy of 47.43% 2 6956.25 108 45/63 2.97 21
in total trades. This return is 9.82% higher than buy-and-hold 3 6852.75 229 110/119 1.86 7
profit for same duration. Average profit made by these 4 6778.05 172 79/93 2.17 10
systems is 5574 points, which is 12.93% lower than buy-and- 5 6554.90 126 58/68 2.34 17
6 6550.55 129 60/69 2.30 16
hold profit of 6402. Average number of trades is 368, with
7 6411.15 117 48/69 2.89 20
highest number of trades 497 for system # 44, while lowest
8 6410.95 135 62/73 2.21 14
number of trade is 277 for system# 69. As far as average profit 9 6398.70 120 50/70 2.80 19
by average loss ratio is concern, highest value of 1.81 is 10 6324.05 132 59/73 2.34 15
achieved by system#56, average value is 1.67 for all the 11 6175.45 150 67/83 2.17 12
systems. 12 6127.55 142 61/81 2.39 13
Interesting to note from the test results that lower period of 13 6121.80 123 50/73 2.79 18
moving average works best for profitability, almost all the top 14 6015.55 205 98/107 1.81 8
15 6013.85 163 77/86 1.93 11
results in the test belong to moving average period 3 and 4, on
the other hand all the results with higher period of moving
average generates below average profit and thus higher period From the results it is evident that best performance of CCI is
of moving average is not desirable for profit maximisation. achieved for S&P CNX Nifty50 if period taken is 9 for RSI ,
generating a profit of 7012 points, with total 182 trades,
10. RESULTS OF CCI OSCILLATOR profitable trades 88, unprofitable trades 94 and thus giving an
accuracy of 48.35% in total trades. This return is 9.52%
We have tested CCI trading rules by using every period from 7 greater than buy-and-hold profit for same duration. Average
to 21 ,so it concluded with total 15 different tests for this profit made by these systems is 6446 points, which is 0.68%
trading rule on 11 years of S&P CNX Nifty 50 data from 1st higher than buy-and-hold profit of 6402. Average number of
Jan. 2004 to 31st Dec. 2014. Detail analysis is available on trades is 149, with highest number of trades 229 for system #
Table-3 for all 15 tests. 3, while lowest number of trade is 108 for system# 2. As far as
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