Question

QUE // Describe each of the following approaches to technical analysis and note how it would be used by investors.

1. Confidence index
2. Arms index
3. Trading Action
4. Odd- lot trading
5. Charting
6. Moving averages
7. On- balance volume

Which of these approaches is likely to involve some type of mathematical equation or ratio?

Answer 1

Confidence Index: A confidence index works on the assumption that the trends in are seen in bond market are repeated in Stock market. IT is the ratio of the average yield on 10 top-rated bonds divided by the average yield on 10 intermediate-grade bonds. This ratio will always be below 100% because higher rated bonds will offer lower promised yields to maturity. When bond traders are optimistic about the economy, however, they might require smaller default premiums on lower rated debt. Hence, the yield spread will be narrow, and the confidence index will approach 100%. Therefore, higher values of the confidence index are bullish signals, and vice versa.

Arm Index: Arm index is the ratio of total number of advancing stock and declining stock issue to volume traded. The mathematical formula in as follow

Arm Index = (The number of advancing stocks / The number of declining stocks) / (The composite volume of advancing stocks / The composite volume of declining stocks)

When the stock index is near to 1 it indicated that the market is neutral as the up volume and the down volume is evenly distributed over the advancing and the declining issues respectively. Suppose that a very bullish day occurs where there are twice as many advancing issues as declining issues and twice as much advancing volume as declining volume. Despite the very bullish trading, the Arms Index would yield only a neutral value of (2/1)/(2/1) = 1.0, suggesting that the index's reading may not be entirely accurate.

Trading action : In simple terms trading decision taken to predict future price on the basis of past price movement in the stock is called trading action.They instead use a combination of price movement, chart patterns, volume, and other raw data from the market to determine whether or not they will make a trade.

Odd-lot Trading: Odd lot trading is done by small individual investors. An odd lot is a transaction of fewer than 100 shares which forms one round lot. The odd-lot theory holds that these small investors tend to miss key market turning points, typically buying stock after a bull market has already run its course and selling too late into a bear market. Therefore, the theory suggests that when odd-lot traders are widely buying, you should sell, and vice-versa.