Technical analysis of the securities market. Its concept, challenges and performance

Actuary of theme is determined by the relatively recent emergence of technical analysis as a unified theory of general philosophy, axioms and basic principles. Despite the fact that the basic tenets of the theory of technical analysis and some of its techniques were formed and developed in the early of the 20th century, combining in a sufficiently comprehensive theory was only in the 70s. Later, in the 80s rethinking and improving the tools and principles of technical analysis applied to the changed conditions of the world's currency and stock markets continued. New techniques were created, which represented a new approach to technical analysis. Significant prospects opened up due the constant improvement of computer systems, which make it possible to take full advantage of a solid mathematical basis of technical analysis. However, the accumulated potential of technical analysis has not yet been fully realized, and many essential aspects and methods of technical analysis are not disclosed until the end and require its further development.

Researched topic becomes even more relevant seeing the integration of the stock market of Kazakhstan into the world economy and the extension of all economic processes (both positive and negative)to Kazakhstan that take place in most countries of the world. Conformation of this thesis were the events of the global financial crisis that began in late 2008. Kazakh investors have had undoubtedly greater access to the world's currency and stock markets, than it was possible 10 years ago. However, it seems unlikely that the ongoing operations in these markets will be successful without the using of technical analysis, as well as his newest techniques adapted to the current economic conditions and used by all well-known international financial institutions.

The title "technical analysis" sounds surprising for a relatively simple approach to stock trading. Simply put, technical analysis is a method of studying the prices, which main instrument is graphics.

The roots of modern technical analysis go to the beginning of the century, to the theory of Charles Dow. Arising out of it, directly or indirectly, it has absorbed such principles and concepts as the directional movement of prices, "prices take into account all known information", confirmation and divergence, “volume as a mirror of the price changes”, and support / resistance. A widely spread Dow Jones Industrial Average Index is a direct descendant of the Dow Theory.

Contribution of Charles Dow to the modern technical analysis is truly invaluable. His focus on learning the basics of price movements created completely new method of market analysis.

The price of a security represents an agreement. This is the price at which the one investor agrees to buy, another to sell. The value, that suits the buyer and seller, is primarily based on their expectations. If an investor expects rising of paper rate, he will buy, and if he counts on its fall, he will sell. These simple conclusions seriously complicate forecasting of prices as they are related to human expectations. Everyone, due to own experience, knows that human nature is difficult to quantify or predict. And this is enough to make any failure to any mechanical trading system [1].

Many investment decisions around the world are made based on irrelevant factors. Solutions, expectations and confidence are affected by relationships with family, neighbors and the chief, the traffic, the amount of income, past successes and failures.

The price of security is determined by fund manager and head of the family, the student, and the carpenter, the doctor and teacher, lawyer and landscape-painter, rich and poor. Such wide range of participants in the exchange inevitably creates an element of unpredictability and excitement.

If prices are based on the expectations of investors, then it is important to know not how much security should cost (fundamental analysis), and how many are willing to pay for it the rest of the investors. This does not imply that the objective value of the paper is not important to know. It is important. But usually the opinion of the overwhelming majority of market participants about future income on the stock is so unanimously and strong that the average investor cannot influence it or change it.

Technical analysis is studying of past price in order to determine the likely direction of future development. The current trend of prices (i.e. current expectations) is compared with a comparable price movements in the past, thereby a more or less realistic forecast is achieved. Follower of "pure" technical analysis probably would explain the fact that history repeats itself. Others are restricted to the phrase: “the past is our teacher”.

How does the technical analysis contribute to successful trading? Comparison with the game of roulette helps to understand this better. But we must immediately make a reservation – gamblers, in contrast to the investors, are entirely at the mercy of emotions (though, if you look at the actions of many investors, compared with gambling is the best).

Casino owners make money on the game of roulette is not because they know what number comes next. They just slightly improve their chances by adding "Zero" and "Double Zero".

Similar to those observed on the stock exchange: buying a security, the investor does not know whether the price of paper will increase. But if he buys a paper on an upward trend, after a short recession and falling interest rates, he increases a chance to make a profit. There is not a passion but calculation.

However, many investors buy the paper, without attempt to influence their chance.

Contrary to the traditional view, investor does not need to know where the price of security will move in order to win. The task is to increase the probability of the conclusion of profitable trades.

Even if the analysis is reduced only to the determination of long-term, medium-term and short-term trends, it is an advantage, which would not exist without technical analysis.

Technical analysis is almost entirely based on the analysis of price and volume. Interpretation of various fields that determine the price of securities and trading volume is given below.

Open price is a price of the first transaction of current period (for example, the first deal of the day). Open price is especially significant in the analysis of daily data, as it reflects the unanimous opinion, to which all market participants came to the morning. As we know “tomorrow is another day”.

High price is the highest price of paper of current period. This is the level at which there are more sellers than buyers (i.e. investors, who want to sell at a higher price, are always, but the maximum is the highest price at which buyers agree).

Low price is the lowest price of paper of current period. This is the level at which there are more buyers than sellers (i.e. investors, who want to buy at a lower price, are always, but the minimum is the lowest price at which sellers agree).

Close price is the last price of paper of current period. This price is more often used in the analysis, thanks to its wide information availability.

Volume is a number of shares (or contracts), which were concluded transactions for the period. The relationship between prices and volume (e.g. price increase on the background of the increasing volume) has a great analytical value.

Open interest is a total unrealized futures or options contracts (i.e. not executed, not closed or unexpired). Open interest is often used as an independent indicator [1].

Bid is the price that the market maker is willing to pay for a security (i.e. the price at which you can sell).

Ask is the price that the market maker is willing to sell a security (i.e. the price at which you can buy).

These simple terms found the hundreds of technical tools used to study price relationships, trends, models, etc.

There are three postulates which technical analysis is based on:

1) The market takes into account all.

2) Price movement is obeyed by trends.

3) History repeats itself.

The market takes into account all. This statement, in fact, is the cornerstone of the entire technical analysis.

Technical analysts believe that the reasons that somehow can affect the market value of the commodity futures (the reasons for this may be the most diverse properties: economic, political, psychological - any), will certainly be reflected in the price of this commodity. Therefore all that is required is careful study of price movements [1].

Any changes in the dynamics of supply and demand are affected into the price movement. If demand exceeds supply, prices rise. If supply exceeds demand, prices go down. This is, in fact, lies at the heart of any economic forecasting.

A technical analyst approaches the problem from the other end, and argues as follows: if market prices have gone up regardless of what the cause may be, therefore, demand exceeds supply. Consequently, the market is favorable for the bulls on macroeconomic indicators. If prices fall, the market is favorable for bears.

As a rule, experts in the analysis of graphs do not prefer to go into the root causes that led to the rise or fall in prices. Very often in the early stages, when the tendency to change prices has only just emerged, or, on the contrary, in some crucial moments the reasons for such changes may be no one knows.

It may seem that technical approach excessively simplifies and coarsens the problem, but the logic that stands behind the first initial postulate - "the market takes into account all" - becomes more obvious than technical analyst acquires more experience of real work in the market.

Price movement is obeyed by trends.

The concept of trend is one of the basic technical analysis. It is necessary to understand that, in fact, everything that happens in the market, is obeyed by one or another trend.

The main purpose of scheduling dynamics of prices in the futures markets is to identify these trends at an early stage of their development and trade according to their direction. Most methods of technical analysis are trend-following in nature, that is, their function is to help the analyst to recognize the trend and follow it throughout the period of its existence.

Two consequences derive from the position that the price movement is obeyed by trends. The first consequence – the current trend, in all probability, will continue and will not reverse itself. This consequence is not nothing but a paraphrase of the first Newton's law of motion. The second consequence – the current trend develops until the reverse movement will not start.

History repeats itself. Technical analysis and studies of market dynamics are closely connected with the study of human psychology. For example, the price patterns, that have been identified and classified within the last hundred years, reflect important characteristics of the psychological state of the market. First of all, they indicate what kind of mood, bullish or bearish, currently prevail in the market. And if in the past, these models worked, there is every reason to believe that they will work in the future, because they are based on human psychology, which does not change with age. Last postulate can be formulated in a slightly different way: the key for understanding the future lies in the study of the past. And it is possible quite differently: the future is just a repetition of the past.

If technical analysis is mainly engaged in the study of the dynamics of the market, the subject of research of fundamental analysis is economic forces of supply and demand that cause price fluctuations, i.e., make them go up, down or maintained at the current level. All factors are analyzed during fundamental approach, which somehow affect the price of the goods. This is done in order to determine the internal or the actual value of the goods. According to the results of fundamental analysis, this real value reflects how a particular product is actually worth. If the actual value is below the market price, then you need to sell the goods, as for people give more than it is actually worth. If the actual value is higher than the market price, then you need to buy, because the good is cheaper than it is actually worth. In this case, investors base their decisions solely on the laws of supply and demand [2].

Both of these approaches of forecasting market dynamics are trying to solve the same problem: determine in which direction prices will move. But they solve this problem in different ways. If the fundamental analyst tries to understand the reason of market movements, the technical analyst is only interested in the fact that movement. All he needs to know is that this motion or dynamics of the market takes place, and what caused it is not so important. Fundamental analyst will try to find out why it happened.

One of the strengths of technical analysis is that it can be used for almost any means of trade and in any time interval. There is no area in the operations on the stock and commodity exchange, wherever technical analysis techniques have not been applied.

When it comes to commodity markets, the technical analyst, thanks to their schedules, can monitor the situation on any number of markets, which is not for the fundamentalists. The last one usually uses that amount of data for its various projections that are simply forced to specialize in any single market or markets group: for example, cereals, on metals, etc. The advantages of multi-specialty is obvious.

First of all, there are periods of burst of activity and periods of lethargy, periods of pronounced price trends and periods of uncertainty in any market. Technical analyst can focus all attention and energy on those markets where price trends clearly traced, and all other long neglected. In other words, he makes the most of the advantages of the rotational nature of the market, but in practice this is reflected in the rotation of attention and money. In different periods of time, different markets suddenly start to "boil", their prices constitute a clear trend, and then the activity fades, the market becomes sluggish, price trends is uncertain. But flurry of activity suddenly begins at some other market at this moment.

"Extensive review" is another advantage of technical analysts. And in fact, they have a clear picture of what is happening in general in the commodity markets immediately following all markets. This allows them to avoid the kind of "tunnel vision" that may be the result of specialization in any group of markets. In addition, most futures markets are closely linked to one another, they are exposed by the same economic factors. Consequently, the dynamics of prices in one market or group of markets may be clue to where entirely different market or group of markets will go in the future.

The graph is the basis of technical analysis. And in this case, as technical analysts say, it is really better to see once than hear a hundred times (or read). Analysts use several types of graphs in the stock market [5].

KASE is the only representative of the stock market in Kazakhstan.

KASE is an active member of the Federation of Euro-Asian Stock Exchanges (FEAS). In 2011, KASE hosted the 17th General Assembly of FEAS in Almaty.

The recent history of KASE is remarkable expansion of international activities, active implementation of corporate governance standards, work on a comprehensive risk minimization with access to a fundamentally different level of reliability of trading and settlement, so in 2012, KASE has successfully coped with the first stage of the government program "People's IPO".

Today, the Exchange is a universal financial market, which can be divided into five major sectors: the foreign exchange market, the government securities market, stock market and corporate bond market, repo transactions, derivatives market.

Exchange, that is one of the key elements of the infrastructure of financial market in Kazakhstan, seeks to meet the needs of participants in the national capital market, contribute to sustainable development of the financial system, including taking an active part in the implementation of the strategic objectives of the government in this direction [6].

Exchange should become an attractive trading platform for domestic and foreign investors and issuers, professional participants of the securities market, constantly expanding the range of services and ensuring their compliance with international standards.

Exchange must become modern infrastructural institutions of the national market of financial instruments by 2020, meeting international standards organization of trading, competitive and attractive to domestic and foreign investors, issuers, professional participants of the securities market, effective trading platform for the funding of the national economy.

The main strategic directions of development:

1) Increasing of the capitalization of the exchange market and liquidity traded on the Stock Exchange, expanding the list of services offered by the Exchange and traded financial instruments.

2) Implementation of international standards in all areas of the Stock Exchange in order to strengthen its brand, increase the value of its shares and to achieve international recognition of the Exchange.

Talking about the current situation in the stock market of Kazakhstan means, first of all, talk about problems. The first and foremost of these problems is a very low level of liquidity (the ability of assets to be sold quickly at a price close to the market price).So there are conditions for directly control the market by raising or lowering prices by a few investors. This discourages local and foreign investors.

The usual situation on the stock exchange should be: stock prices fall and people start to buy them, after all the price rises again. In case of low liquidity opposite is true - the lower the level of liquidity, the less people are taking part in the operation. This can lead to the collapse of the stock market at the most negative scenario. The government of Kazakhstan can artificially increase the liquidity through the pension fund, but it does not lead to tangible results, because such operations are restricted.

The second problem is the problem of transparency and lack of access to the company's report for previous periods. All of this information is in the public domain abroad. For example, you can go to the website of the New York Stock Exchange “nyse.org” or Yahoo Finance and see all the data. You can get access to information by paying a few thousand dollars in Kazakhstan. Of course, individual investors will not pay such kind of money, not to mention ordinary people.

The third problem is the lack of derivative financial instruments that reduce the level of risk, which is very important for investors. As a result, this has a negative effect on the level of liquidity.

The Exchange has set the following main tasks in order to implement these strategic directions of its development.

- Expansion of the list of listed companies;

- Expansion of the investor base;

- Expansion of the list of traded instruments and increasing their liquidity;

- Improving the transparency of the exchange market;

- Increased protection of investors;

- Technological development;

- International cooperation;

- Improving corporate structure and management.

Currently, technical analysis, along with fundamental, is the most important method for analyzing exchange markets. The vast majority of players use it in Kazakhstan. One could even argue that the knowledge of at least the basics of technical analysis is a kind of a pass on the market: there is, alas, nothing to do without it there.

Technical analysis, being one of the methods of forecasting price movements of the exchange markets, has many shortcomings that call into question its usefulness.

Fans of technical analysis explained this as follows: “Technical analysis requires highly skilled analyst. Very good result can be achieved due to proper use of it. Therefore, we cannot talk about the problems in the technical analysis. The problem is in its proper use” [8].

The root of the problem is not this case, but the technical analysis as a method of analysis and forecast market price dynamics has organic defects that occur in its basic postulates and generally in most of its ideology.

The root of all errors is a desire of the technical analysts to analyze not market, but schedule.

Quite dissimilar markets are analyzed by the same indicators: stock market and bond market, currency and commodity markets. In some cases, this approach is justified: "double bottom" is "double bottom". But there is not in many cases. The result is an error.

It is necessary to develop a theory that would describe markets (stock, commodity, foreign exchange) as they are, with all their specific features that cannot be reduced to a purely natural, purely financial or purely psychological law. It must be admitted, any organized (exchange) market is a complex system that exists and develops according to its own laws.

RESOURCES

1. Murphy J. Technical Analysis of the Futures Markets: Theory and Practice. Publisher "Falcon", 2006.

2. Piskulov D. "Theory and Practice of currency dealing." Firm "Finance", 2006.

3. Handbook of Monetary dealer. JV "Crocus International," 2012.

4. Nikolaev V. Dictionary of the broker. OXIR Financial Services Ltd., 2007.

5. The foreign exchange market and currency regulation. Textbook / Ed. I.N. Platonovoy. - Publisher "BECK", 2006.

6. Le Beau Charles and Lukas David V. Computer Analysis of the Futures Markets." Publishing house "Alpina", 2008.

7. Robert and Thomas V.Kolbi A. Meyers. Encyclopedia of Technical Market Indicators. Publishing house "Alpina", 2008.

8. Nison Steve. Candlesticks: graphical analysis of financial markets. - Moscow, "Diagram", 2008.

9. Erlih A. Technical analysis of commodity and financial markets. And of "Infra - M" in 2006.

10. Demark T. Technical analysis, a new science. - Moscow, "Diagram", 2007.

11. Alexeev M.Y. Securities market. - M.: Finance and Statistics, 2012.