Technical analysis of the securities market. Its concept, challenges and performance
Table of contents: The Kazakh-American Free University Academic Journal №6 - 2014
Urazova Natalya, Kazakh-American Free University, Kazakhstan
Litvinenko Victoriya, Moscow State University of Economics, Statistics and Informatics (branch), Kazakhstan
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
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
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 .
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 .
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
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
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 .
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
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
"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 .
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
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
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
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.
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.
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
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.
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;
Improving corporate structure and management.
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.
analysis, being one of the methods of forecasting price movements of the
exchange markets, has many shortcomings that call into question its usefulness.
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” .
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.
root of all errors is a desire of the technical analysts to analyze not market,
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.
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.
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Table of contents: The Kazakh-American Free University Academic Journal №6 - 2014