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Investments Based on Technical Analysis Master Thesis Masaryk University Faculty of Economics and Administration Study Program: Finance and Accounting Investments Based on Technical Analysis Master Thesis Supervisor: Author: Ing. Luděk Benada B.ASc. Vukman Manić Brno, February 2017 Masaryk University Faculty of Economics and Administration Department of Finance Academic Year: 2016/2017 Assignment Name: MANIĆ Vukman Department: Finance Topic: Investments Based on Technical Analysis Principles The aim of the thesis: To present the profitable option of investing on selected technical market analysis on the main financial markets and formulate recommendation for novice investors. Methods used to support the thesis conclusion: 1. History, definition and characteristics of technical market analysis 2. Features of technical patterns and indicators 3. Research of retail manual and automated traders’ performance that use only technical analysis 4. Testing and creating defined results of technical trading strategies (system) 5. Limitation and Conclusion 2 Methods: analysis, description, comparison, research, deduction and probability Graphic representations: the nature of the matter is in need of vast graphic illustrations Extent: 60-70 List of Special Literature: BODIE, Zvi; KANE, Alex; MARCUS, Alan J. Investments. 5th ed. Boston: McGraw- Hill/Irwin, 2002. 1016 s. ISBN 0-390-32002-1. MURPHY, John J. Technical Analysis of the financial markets: A Comprehensive Guide To Trading Methods And Applications. 1st ed. New York: NYIF, 1999. ISBN 0-7352- 0066-1. NISON, Steve. Beyond Candlesticks: More Japanese Charting Techniques Revealed. New York: Wiley, 1994. Print. NISON, Steve. Japanese Candlestick Charting Techniques: A Contemporary Guide to the Ancient Investment Techniques of the Far East. New York: New York Institute of Finance, 1991. Print. REILLY Frank K. and BROWN Keith C: Investment Analysis and Portfolio Management, 10th Edition. 2012. ISBN-10: 0538482389 Supervisor: Ing. BENADA Luděk Thesis created on: December 30th, 2016 ______________________ _____________________ Head of Department Dean 3 Name and Surname of the Author: Vukman Manić Title of the Master Thesis: Investments Based on Technical Analysis Title in Czech Language: Investovani založene na technicke analize Department: Finance Supervisor: Ing. Luděk Benada Year of Defense: 2017 Annotation: The master thesis on this topic “Investments based on Technical Analysis” distinguishes the possibility of investing based on technical analysis and its indicators. Furthermore, it investigates if there is a opportunity of being profitable on financial market based only on technical analysis. Also, in the last chapter, chosen technical strategies will be tested. All things considered, conclusion and recommendation, will be presented for novice investors. Keywords: Technical market analysis, financial markets, investments, indicators, retail trading, leveraged trading, financial performance, candlestick patterns, trends, market technical strategy 4 I hereby declare that I worked on my Master Thesis on my own and that all the information sources I used are listed in bibliography paragraph. Moreover, I state that all used literary and other non-scholarly sources are in accordance with law. I agree with storing my thesis in the Library of the Faculty of Economics and Administration, Masaryk University, for the study purposes. ____________________________ Vukman Manić 5 Acknowledgments I would like to show appreciation for people helping me and contributing in writing this thesis. Firstly, I express the gratitude for overall brilliant assistance and very useful comments to my mentor and supervisor professor Ing. Luděk Benada. In addition, I am thanking the Faculty of Economics and Administration for being part of their institution for the past two and a half years. I would also like to express tremendous gratitude to a doctoral student, and my friend Mirjana Rupar, who from the beginning assisted me and providing me valuable insights on the empirical part of the thesis. Additionally, thank you Mirjana for the final reviewing too. Special thanks to my beloved girlfriend Veronika Klodnerová, for fully supporting and translating the important academic material in Czech language, that was used as a literature background in this thesis. Last but not the least, I would like to thank for absolute support to my beloved brothers: Igor, Marko and Vuk (twin). Also, thanks for unconditional love and support to my lovely mother Verica and my great dad Predrag. In the end, I would like to express gratitude to all my friends and colleagues, in particular to Vildana, Nemanja, Vana&Trajan, Marija&Aldin and Uros who kept me float when some moments were hard. 6 Content Content ............................................................................................................................................ 7 1. Overview ................................................................................................................................. 8 1.1 Introduction ...................................................................................................................... 8 1.2 Objectives and Steps ........................................................................................................ 9 1.3 Methodology .................................................................................................................. 10 2. Theoretical Background - Financial Markets ........................................................................ 12 2.1 Financial Markets ........................................................................................................... 14 2.2 Financial Instruments ..................................................................................................... 16 2.3 Role in the Economy ...................................................................................................... 22 2.4 Fundamental Analysis .................................................................................................... 23 3. Technical Analysis ................................................................................................................ 24 3.1 History ............................................................................................................................ 24 3.2 Chart Evolution .............................................................................................................. 25 3.3 Candlesticks ................................................................................................................... 27 3.4 Charting Patterns ............................................................................................................ 28 3.5 Indicators ........................................................................................................................ 41 4. Empirical Evidence ................................................................................................................ 48 4.1 First Part of the Research ............................................................................................... 49 4.2 Second Part of the Research ........................................................................................... 61 4.3 Comparison: Empirical Evidence................................................................................... 69 5. Limitation and Further Research ........................................................................................... 72 6. Conclusion ............................................................................................................................. 72 7. Bibliography .......................................................................................................................... 74 8. List of Figures ........................................................................................................................ 77 9. Appendix ............................................................................................................................... 78 7 1. Overview 1.1 Introduction Over the last decade, financial markets became tremendously accessible to vast majority of people. In addition, due to an internet expansion, financial markets tool has adapted to this technological changes that allowed access to many people to participate on the financial markets (Chen and James, 2010). Furthermore, today we have sophisticated trading platforms that are easy to learn and use for anyone having basic computer literacy. Anybody with an excess to the internet is able to invest today. As a result, many brokerage firms offer huge leverage possibilities to traders. This technological progress allowed individuals, even with a small amount of fund, going lowest of $100, to be able to invest on the financial markets. This practice decade ago, would simply not be possible. Also, there are new researches showing that technical analysis is being used more frequently. In one of the earlier research, Smidt (1965) found that vast majority of investors (80%) on the US commodity futures market, used technical analysis. More recently, Lui and Mole (1998) evidence revealed that more than 85% of foreign exchange investors surveyed (Hong Kong’s FX market) relied heavily on technical analyses. Frankel and Froot (1990) stressed that investment analysts fully include technical analysis for forecasting the financial markets. These evidences suggest that over the past decades, the use of technical analysis slowly started to grow in the practice.
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