Technical Analysis of Black Box Trading: A Case Study
1. Executive Summary
In the days of technology advancement and increasing use of computers for trading and investing, Algorithm trading has become the present trend in the markets. There is much software present in the markets that will enable the trader to buy, sell and implement the strategies that he has designed to be profitable. The prime goal of a trader in a Future and Options segment is to be profitable and sue to the increasing efficiency of the markets he has to be quick to identify opportunities and utilize them. One can do it using technical analysis and fundamental analysis. If the trader is short and medium term or an arbitrageur then his own skills are not enough to identify and trade on various derivatives in various markets. This is where algorithmic trading comes into picture, but while using algorithm trading the system must be able to identify its entry points and exit points. This is done using technical analysis. When the entry and exit is done through technical conditions it is very important to understand which technical indicators work the best in the markets and how efficient are they in making the profits. This study is done to understand what extent the technical analysis is working in the markets and what type of indicators should be used for ranging markets and trending markets. The technical indicators such as Relative Strength Index, Moving Average Convergence Divergence, Slow Stochastic, Fast Stochastic, Average Directional Index, Bollinger Bands and Average True Range are tested on the market for a period of 5 years time from 2008 to 2013 on CNX NIFTY. Their efficiency, profits losses and profit factor were understood in this report by using tradestation software. In short we are buying and selling NIFTY itself.
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2. INTRODUCTION TO THE TOPIC
Algorithm trading also known as black box trading is none other than computer based trading which buys and sells commodities, shares , forex and bonds on the based of the strategy
In the days of technology advancement and increasing use of computers for trading and investing, Algorithm trading has become the present trend in the markets. There is much software present in the markets that will enable the trader to buy, sell and implement the strategies that he has designed to be profitable. The prime goal of a trader in a Future and Options segment is to be profitable and sue to the increasing efficiency of the markets he has to be quick to identify opportunities and utilize them. One can do it using technical analysis and fundamental analysis. If the trader is short and medium term or an arbitrageur then his own skills are not enough to identify and trade on various derivatives in various markets. This is where algorithmic trading comes into picture, but while using algorithm trading the system must be able to identify its entry points and exit points. This is done using technical analysis. When the entry and exit is done through technical conditions it is very important to understand which technical indicators work the best in the markets and how efficient are they in making the profits. This study is done to understand what extent the technical analysis is working in the markets and what type of indicators should be used for ranging markets and trending markets. The technical indicators such as Relative Strength Index, Moving Average Convergence Divergence, Slow Stochastic, Fast Stochastic, Average Directional Index, Bollinger Bands and Average True Range are tested on the market for a period of 5 years time from 2008 to 2013 on CNX NIFTY. Their efficiency, profits losses and profit factor were understood in this report by using tradestation software. In short we are buying and selling NIFTY itself.
1
2. INTRODUCTION TO THE TOPIC
Algorithm trading also known as black box trading is none other than computer based trading which buys and sells commodities, shares , forex and bonds on the based of the strategy
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