summer proj final

8/7/2019 summer proj final

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TABLE OF CONTENTS

Chapter

NoTITLE Page No

ACKNOWLEDGEMENT 1

TABLE OF CONTENTS 2

LIST OF TABLES 3

LIST OF FIGURES 4

LIST OF ABBREVIATIONS 5

EXECUTIVE SUMMARY 6

1 INTRODUCTION 7

1.1 Introduction to the Topic 7

1.2 Background of the study19

2 THEORETICAL FRAME WORK & REVIEW OF LITERATURE 14

3 RESEARCH METHODOLOGY24

4 DATA ANALYSIS AND INFERENCE 30

5 FINDINGS OF THE STUDY 69

6 CONCLUSION 74

REFERENCES Xi

APPENDICES Xiv

EXECUTIVE SUMMARY

The growth of futures trading in commodity is tremendous; starting with trade in 7 commodities

till 1999, futures trading is now available in 146 commodities. There are more than 3000 members

registered with the exchanges. More than 20,000 terminals spread over more than 800 towns/cities of the

country provide access to trading platforms. According to Forward Markets Commission (FMC) data,


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commodities worth Rs 77.65 trillion were traded in 2009-10, up by 48% compared to previous year and

more than 120 times of the value of business transacted since the introduction of electronic trading in

2003.

In the light of the observations the study aims at technical analysis based on two main

tools used in the financial market. with regard to the commodity futures market, fundamental analysis is

difficult to apply as we cannot get accurate supply and demand statistics of a particular commodity all

over the world. Hence technical analysis comes in as a handy tool for the investors.

This research work is mainly attempted towards study of the awareness of investors about

technical analysis in commodity trading and suggestion of some simple technical analysis tools to

increase their profitability. The study is confined to the period of four months covering January to april

2010. The sample size for the study was 50 . Frequency analysis was used to describe the variables. The

various statistical tools used were Chi square test, Analysis of Variance. It was found that 60 percentage

of the investors do technical analysis themselves. In this study the software-windsor4 was used for doing

technical analysis. There are hundreds of tool available for technical analysis of which the choosing the

combination of three tools namely Bollinger bands, RSI, PSAR, give 85% accurate predictions.

CHAPTER I

INTRODUCTION

1.1INTRODUCTION TO THE TOPIC:


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Commodity exchange operations are peculiar in nature and most of the Investors feel insecure in

managing their investment on the commodity market because it is difficult for an individual to identify

commodity which have growth prospects for investment. Further due to volatile nature of the markets, it

requires constant market watch and proper understanding and perception of price movements to capitalize

the growth opportunities and make more profit. Technical analysis is a method of evaluating securities by

analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts

do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify

patterns that can suggest future activity. There by increasing the profitability.

1.1.1. TECHNICAL ANALYSIS

There are two major types of analysis normally used to predict the performance of commodity

futures: fundamental and technical. Fundamental analysis examines the supply and demand factors that

influence price, while technical analysis is the study of price and price behavior. There are many different

types of technical analysis tools. Some rely on chart patterns others use technical indicators and

oscillators, and most use some combination of the two.

Applying technical analysis to charts allows commodity traders to identify patterns, trends as well

as other factors that affect price movement; which they then use to aid in buy and sell decisions.

Technical analysis includes such principles as the trending of prices, current prices discounting all-known

information, moving averages, volume effecting changes in price, and even the identification of support

and resistance levels in small and large periods from minutes to months.

The price of a commodity represents an agreement between buyers and sellersfor all the

information about that commodity at any given point in time. It is the price at which one person agrees to

buy and another agrees to sell. This price at which a trader is willing to buy or sell depends primarily on

his/her expectations about the future. Technical analysis is a method of evaluating commodities by

analyzing statistics generated by market activity, past prices, indicators, and volume. Technical analysts

do not attempt to measure a commodity's intrinsic value; instead they look for patterns and indicators on

the charts that will determine the future performance.

Technical analysis reflects on historical prices in an effort to determine probable future prices.

This is done by comparing current price action with comparable historical price action in order to predict

a logical result. The premise with technical analysis is that history repeats itself in price behaviour

because human behaviour repeats itself. Although, market dynamics are constantly changing the

behaviour of the investor, namely fear and greed and how they play into the psyche of traders has not

changed over time.


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1.1.2. ASSUMPTIONS BEHIND TECHNICAL ANALYSIS

The field of technical analysis is based on three assumptions:

i. The market discounts everything.

ii. Price moves in trends.

iii. History tends to repeat itself.

i. The Market Discounts Everything

Technical analysis only considers price movement, ignoring the fundamental factors of supply

and demand. However, technical analysis assumes that, at any given time, a commodity's price reflects

everything that has or could affect supply and demand. Technical analysts believe that the commodity's

supply and demand, along with broader economic factors and market psychology, are all priced into thecommodity, removing the need to actually consider these factors separately.

ii. Price Moves in Trends

In technical analysis, price movements are believed to follow trends. This means that after a trend

has been established, the future price movement is more likely to be in the same direction as the trend

than to be against it. Most technical trading strategies are based on this assumption.

iii. History Tends To Repeat Itself

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms

of price movement. The repetitive nature of price movements is attributed to market psychology; in other

words, market participants tend to provide a consistent reaction to similar market stimuli over time.

Technical analysis uses chart patterns to analyze market movements and understand trends. Although

many of these charts have been used for more than 100 years, they are still believed to be relevant

because they illustrate patterns in price movements that often repeat themselves.

1.1.3. TOOLS USED IN TECHNICAL ANALYSIS

i. Types of charts


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OHLC "Bar Charts" - Open-High-Low-Close charts, also known as bar charts, plot the span

between the high and low prices of a trading period as a vertical line segment at the trading time,

and the open and close prices with horizontal tick marks on the range line, usually a tick to the

left for the open price and a tick to the right for the closing price.

Candlestick chart - Of Japanese origin and similar to OHLC, candlesticks widen and fill the

interval between the open and close prices to emphasize the open/close relationship. In the West,

often black or red candle bodies represent a close lower than the open, while white, green or blue

candles represent a close higher than the open price.

Line chart - Connects the closing price values with line segments.

Point and figure chart - a chart type employing numerical filters with only passing references to

time, and which ignores time entirely in its construction.

ii. Concepts

Resistance - a price level which acts as a ceiling above prices

Support - a price level which acts as a floor below prices

Breakout - the concept whereby prices forcefully penetrate an area of priorsupport orresistance,

usually, but not always, accompanied by an increase in volume.

Trending - the phenomenon by which price movement tends to persist in one direction for an

extended period of time

Average true range - averaged daily trading range, adjusted for price gaps

Chart pattern - distinctive pattern created by the movement of security prices on a chart

Dead cat bounce - the phenomenon whereby a spectacular decline in the price of a stock is

immediately followed by a moderate and temporary rise before resuming its downward

movement

Elliott wave principle and the golden ratio to calculate successive price movements and

retracements

Momentum - the rate of price change

Point and figure analysis - A priced-based analytical approach employing numerical filters which

may incorporate time references, though ignores time entirely in its construction.

iii. Overlays

Overlays are generally superimposed over the main price chart.
http://en.wikipedia.org/w/index.php?title=OHLC_%22Bar_Charts%22&action=edit&redlink=1http://en.wikipedia.org/wiki/Candlestick_charthttp://en.wikipedia.org/wiki/Line_charthttp://en.wikipedia.org/wiki/Point_and_figure_charthttp://en.wikipedia.org/wiki/Resistance_(technical_analysis)http://en.wikipedia.org/wiki/Support_(technical_analysis)http://en.wikipedia.org/wiki/Breakout_(technical_analysis)http://en.wikipedia.org/wiki/Support_(technical_analysis)http://en.wikipedia.org/wiki/Resistance_(technical_analysis)http://en.wikipedia.org/w/index.php?title=Trending&action=edit&redlink=1http://en.wikipedia.org/wiki/Average_true_rangehttp://en.wikipedia.org/wiki/Chart_patternhttp://en.wikipedia.org/wiki/Dead_cat_bouncehttp://en.wikipedia.org/wiki/Elliott_wave_principlehttp://en.wikipedia.org/wiki/Golden_ratiohttp://en.wikipedia.org/wiki/Momentum_(technical_analysis)http://en.wikipedia.org/wiki/Point_and_figure_charthttp://en.wikipedia.org/w/index.php?title=OHLC_%22Bar_Charts%22&action=edit&redlink=1http://en.wikipedia.org/wiki/Candlestick_charthttp://en.wikipedia.org/wiki/Line_charthttp://en.wikipedia.org/wiki/Point_and_figure_charthttp://en.wikipedia.org/wiki/Resistance_(technical_analysis)http://en.wikipedia.org/wiki/Support_(technical_analysis)http://en.wikipedia.org/wiki/Breakout_(technical_analysis)http://en.wikipedia.org/wiki/Support_(technical_analysis)http://en.wikipedia.org/wiki/Resistance_(technical_analysis)http://en.wikipedia.org/w/index.php?title=Trending&action=edit&redlink=1http://en.wikipedia.org/wiki/Average_true_rangehttp://en.wikipedia.org/wiki/Chart_patternhttp://en.wikipedia.org/wiki/Dead_cat_bouncehttp://en.wikipedia.org/wiki/Elliott_wave_principlehttp://en.wikipedia.org/wiki/Golden_ratiohttp://en.wikipedia.org/wiki/Momentum_(technical_analysis)http://en.wikipedia.org/wiki/Point_and_figure_chart


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Based on the physical property the commodities traded have been distinguished into the

following type.

Commodity exchanges have gradually developed from physical markets where deals were made

out of warehouses to futures markets which allow for both hedging to protect the losses in a declining

market and speculation for gains in a rising market. The derivatives markets for futures were developed

initially to help agricultural producers and consumers manage their price risks.

Turnover in exchange-traded commodity derivatives increased from 2.8% of global exchange-

traded derivatives in 2003 to 4.3% in 2007. During this period commodities share of the number ofcontracts outstanding increased from 6.7% to 10.9%. Prior to this, since the introduction of financial

futures in the 1970s, commodities relative contribution to overall derivatives exchange trading had

fallen.

Worldwide, there are around 50 major commodity exchanges that trade in more than 90

commodities. Soft commodities are traded around the world and dominate exchange trading in Asia and

Latin America. Metals are predominantly traded in London, New York, Chicago and Shanghai. Energy

contracts are mainly traded in New York, London, Tokyo and the Middle East. More recently a number

of energy exchanges have emerged in several European countries. In terms of the number of futures

contracts traded, in 2007 China and the US had three exchanges amongst the largest ten, the UK two and

Japan and India one each (Table 2). The New York Mercantile Exchange was the largest commodities

exchange in the world followed by Chinas Dalian Commodity Exchange and the Chicago Board of


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Trade. The UKs ICE Futures was fourth and the London Metal Exchange sixth. Trading on exchanges is

fairly concentrated. In 2007 the top five exchanges accounted for around two-thirds of contracts traded

globally slightly down on their 70% share in 2003.

1.1.5. Chart showing the Geographic split of exchange traded commodity trading

% share, number of contracts traded (of largest 25 exchanges), 2009

China and India have gained in importance in recent years with their emergence as significant

commodities consumers and producers. Over the past decade a number of large exchanges have opened in

China and India such as the Shanghai Futures Exchange, Zhengzhou Commodity Exchange and the

Dalian Commodity Exchange in China and the National Commodity and Derivatives Exchange and MCX

in India.

The following chart shows the relative importance of exchange traded commodities


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1.1.5. Table showing commodity-wise turnover

1.2. Background of the Study:


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The history of futures trading in commodities in India dates back to the later part of 19th century

when the first commodity exchange, the Bombay Cotton Trade Association Ltd was set up for organizing

futures trading. The early 20th century saw the mushrooming of a number of commodity Exchanges. The

principal commodity markets functioning in pre-independence era were the cotton markets of Bombay,

Karachi, Ahmedabad and Indore, the wheat markets of Bombay, Hapur, Karachi, Lyallpur, Amritsar,

Kara and Calcutta; the groundnut markets of Madras and Bombay; the linseed markets of Bombay and

Calcutta; Jute and Hessian markets of Calcutta; Bullion markets of Bombay, Calcutta, Delhi and Amritsar

and sugar markets of Bombay, Calcutta,Kanpur and Muzaffarnagar. There were no uniform guidelines or

regulations.

In order to provide constant vigil to prevent crisis, a comprehensive legislation was enacted by

the Bombay State called Forward Contract (Regulation) Act 1952. which provided the legal framework

for organizing forward trading in the country and provided, inter alia, for recognition of Exchanges. This

framework continues to exist even today. One of the important features of this Act is to notify a

commodity for prohibition or regulation of forward contract. Under these provisions, a large number of

commodities were notified for prohibition during the 1960s which left only a handful of insignificant

commodities open for forward trade. This scenario continued for about four decades although the

Dantawala Committee (1966) and Khusro Committee (1980) had recommended steps to revive futures

trading in more agriculture commodities.

Subsequent to liberalization of Indian economy in 1991, a series of steps were taken to liberalise

the commodity forward markets. The Kabra Committee (1994), the earliest post-1991, recommended

opening up of futures trading in 17 selected commodities.The year 2003 is a watershed in the history of

commodity futures market. The last group of 54 prohibited commodities was opened up for forward

trading, along with establishment and recognition of three new national exchanges with on-line trading

and professional management. Prohibition on forward trading was completely withdrawn. The new

exchanges brought capital, technology and innovation to the market. These markets notched up

phenomenal growth in terms of number of products on offer, participants, spatial distribution and volume

of trade. Starting with trade in 7 commodities till 1999, futures trading is now available in 146

commodities. Almost all of this (97.2%) of this is now accounted for by the three national exchanges. The

other 21 Exchanges have a miniscule share in the total volume.

The growth in the commodity derivative trading witnessed in 2005-06 continued during

2006-07. Total volume of trade rose sharply from Rs. 1.29 lakh crore in 2003-04 to Rs. 27.39 lakh crore

in 2006-07 (till December 2006) (Table 4.15). In the first nine months of 2006-07, the volume of trade

was already more than Rs. 21.55 lakh crore achieved in the twelve months of 2005-06. Turnover as a


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proportion of GDP increased from only 4.7 percent in 2003-04 to 18.3 per cent in 2004-05 and further to

76.8 per cent in 2005-06. The growth in the volume of trading has been primarily propelled by

Multi Commodity Exchange, Mumbai (MCX) and National Commodity Derivatives Exchange, Mumbai

(NCDEX)

1.2.1. Table showing month wise value of trade

The growth in commodity futures trade has spawned an upsurge of interest in a number of

associated fields, viz. research, education and training activities in commodity markets, commodity

reporting for print and visual media, collateral management, commodity finance, ware-housing, assaying

and certification, software development, electronic spot exchanges etc. Markets and fields almost non-

existent four years ago now attract significant mind-share nationally and internationally.


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With such a growth the commodity trading requires the attention of the investors in commodity

futures to expand and update their knowledge in trading to gain profit. Fundamental analysis is difficult to

apply when we consider the commodity market, as the supply and demand statistics pertains to various

nations and it is not commonly available like stock market. This brightens the use of technical analysis for

commodity trading.

1.3 Need for the study

Commodity futures trading is expanding. To make profits we must know about the commodities

and factors influencing the price. Though fundamental analysis is the preferred method of evaluation of

securities it is difficult in commodity futures market because we cannot predict the exact supply and

demand condition of the commodity since it requires worldwide detail. Hence we go for technical

analysis where we use the price and past patterns to predict the future pattern of price of the commodity.

1.4 Scope of the study

Investment in commodity markets has been very popular and rewarding for investors in U.K. and

U.S.A. Its expanding in India and the participants are increasing day by day. For investors looking for

diversification beyond stock markets, commodity markets offer another investment option. The

commodity markets activity, volume and players multiplied in the recent past. In India, although the

trading in commodity markets and commodity exchanges is booming, it has to cross few more hurdles

like permitting Fills, banks and other financial institutions to operate in these markets. It is obvious that

the market will grow and hence the number of players will increase in such a case technical analysis

would gain its importance and the knowledge about it would become an advantage.

1.5 Objectives of the study:

1.5.1 Primary Objective

The main objective of the study is

To identify the technical analysis tools generally used

To assess the profitability of each individual technical analysis tool .

To find out combination of tools which give more profit.


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1.5.2 Secondary Objectives:

To know what percentage of the investors use technical analysis

To know about the perceptions of the investors regarding their selection of commodities.

To understand the risk appetite of the investors and if it got any relationship with their knowledge

about technical analysis.

To know about how the investors get advice for their investment decisions and what are the

popular means of making the decision

To know the investors knowledge of technical analysis and market watch and its relationship

with the different ranges of returns earned by them.

1.6 Limitations of the study

This study has the following limitations

The Sample of commodities is very small (three) when compared to the entire list of commodities

which are allowed to be traded in India through commodity exchanges.

The Sample of indicators is considered is only 6


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The sampling of investors is restricted to Coimbatore region only.

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