Financial Trading Techniques - Assignment Example

Financial Trading Techniques Report The five stocks that will be analyzed from the FTSE include: Barclays plc (BARC), Vodafone Group plc (VOD), BP Plc (BP), Rolls Royce Holdings Plc (RR), and Royal Bank of Scotland Group plc (RBS). The intraday (minute-by-minute) equity data that is provided for each stock, will be tested for: directional movement indicators; ADX; DI+/DI-; oscillators; momentum and ROC; MACD; and RSI. Part A. From the intraday (minute-per-minute) equity data provided, five stocks were chosen to test:   1. Directional Movement Indicators. Barclays, Vodafone, BP, Rolls Royce, and RBS were all doing very well in terms of movement indicators when analyzed. 2. ADX. Since ADX is derived from the DMI, you will typically see two lines that are plotted in chart windows. 3. DI+/DI-. All of these companies had positive directional indicators on the day viewed. 4. Oscillators. Oscillators will usually charts that do not trend, meaning that stock market analysts can tell when something is being oversold or overbought. Neither of these were the case for the 5 stocks picked. 5. Momentum and ROC. Rate of Change (ROC) best describes the momentum of a stock; in this case the 5 stocks picked remained at relatively good price points. 6. MACD. The Moving Average Convergence/Divergence factor indicates the technical analyses of various prices of stock. In this case, the MACD did not show much divergence on the part of the stocks investigated here. 7. RSI. Relative Strength Indicator (RSI) is a key technical, analytical tool which is also used as an oscillator is a key indicator in analyzing market trends—primarily to see if a stock is going to perform well overall—which was true of all 5 of the stocks picked. Monetary policy of banks and other institutions such as a government itself can and definitely does respond to stock market movements in the UK and Europe (with a primary focus on the analysis of the UK stock market). The real questions lie in: what are the motivations behind such decisions; the theory involved in monetary policy which guides decisions; and the results of such interventions (if one will). For example, when the United States needed to bail out some of the nation’s largest banks and financial institutions—such as large major insurance conglomerate AIG—then the government arranged TARP money to be set aside for the purposes of keeping these institutions from going into financial ruin. The motivation behind adjusting monetary policies to cater to the stock market, the theory behind such investments, and the results of such investments are evident today—which will be discussed in-depth in this piece. Monetary policy influences everything from interest rates on mortgages to food prices, and thus it is important that the monetary policies of banks and the government definitely respond to changes in the stock market. With the available statistics and evidence provided in the forms of tables and graphs, it will be proven that monetary policy does indeed respond to the stock market. Since monetary policy is so influential in the ebb and flow of the stock market, it is important to analyze how UK monetary policy has been manipulated in order to adjust to the unpredictability of the market’s performance. Generally, monetary policy tends to reflect what the markets do based on an overall basis, not a day-to-day basis. For example, the GDP of a country is calculated annually. GDP is called the Gross Domestic Product, and it basically entails how much a country is producing per annum due to its sale of goods and services. So, the higher the GDP of a country is, the higher its profitability should be. A low GDP signals that a country lacks resources or is otherwise having a difficult time developing products. “Real GDP measures output in constant prices” (Boyes & Melvin, 2006, pp. 131). Being able to effectively figure out how much goods and services are provided is one economic indicator that aids economists in being able to parse how well the economy is doing. “The gross domestic product (GDP) is the market value of final goods and services produced…GDP is the most widely used measure of economic performance” (Gwartney, Stroup, & Sobel, 2008, pp. 149). Part B. Identify Trend Directions and Analyse Buy and Sell Signals  2. Implement in a real case scenario (at your choice) Delta Hedging, Straddles and Strangles.  Companies in which we will analyze later on in this piece will have to do with real case scenarios. According to the Company List, one can search “by name, region, industry, or exchange and then add filters to narrow your search. Once youve got the list of companies you want, you can export it for offline use” (2015, pgh. 1). There are a variety of companies from which one can choose case scenarios for delta hedging, straddles, and strangles, utilizing the social media companies of Google, Facebook, and Twitter—respectively. Google has employed an options strategy, in order to focus on long-term gains. An options strategy that aims to reduce (hedge) the risk associated with price movements in the underlying asset by offsetting long and short positions. For example, a long call position may be delta hedged by shorting the underlying stock” (“Delta Hedging Definition,” 2015, pgh. 1). Google has used its investing potential in order to data-mine. It is common knowledge that the site gets thousands and thousands of searches per minute. While it is obvious that the dip in mergers up till 2001 did not rise back up until 2006 five years later, the sheer amount of value of the transactions was very high in 2000, and never returned to that amount before or since. (See Mergers and Acquisitions by UK Companies in the attached Excel file, Exhibits A & B.) This general trend shows that there are peaks and valleys within the industry of mergers and acquisitions. Being a very speculative business, it is obvious that the amount of mergers experienced between 1999 and 2008 dipped twice, once in 2003 and once in 2008. Meanwhile, the amount of the value of the mergers and acquisitions reached an all-time low of 8,709 in 2004—as it seems that the value of mergers is currently also undergoing a dip of sorts as of 2008. This trends the shadow of the dip of the amount of mergers in 2003 and 2008. What this tells us is that the economy as of late on the London Stock Exchange (LSE) has been experiencing a general downturn in the amount of mergers and acquisitions taking place, and therefore less volume of capital is being moved. This could have an overall dire effect on the UK economy. The effect is not only felt in the UK’s economy, however, but also by other countries’ economies. As such, the trends indicate that the UK is either going through or developing in the midst of a recession. Since mergers can be signs of a healthy economy, the more productive mergers there are of small businesses into larger ones—signal that the economy may be improving, whilst mergers of larger businesses into larger ones may signal that the economy is weakening. Long straddle positions include what companies like Facebook do, where they evaluate from month-to-month. “A long straddle position is entered into simply by buying a call option and a put option with the same strike price and the same expiration month” (Kaeppel, 2011, pgh. 5). In options, Twitter stockholders would probably prefer the strangle, which could make predictions in order to squeeze money out of potential dips or surges in growth, essentially selling short when the prediction is that the market will take a dive and stocks will plummet in value. Stockbrokers therefore borrow against the fact that companies will essentially tank or fail in terms of market value in terms of stocks. “A strangle consists of purchasing an out-of-the-money call and out-of-the-money put, thereby strangling the stock price” (Kinahan, 2013, pgh. 9). Here, we have discussed delta hedging, straddling, and strangling as useful strategies. SELECTED BIBLIOGRAPHY Boyes WB & Melvin M (2006). Economics. US: Thomson Learning, Inc. Company list (NASDAQ, NYSE, & AMEX). (2015). [Online]. Retrieved 23 February 2015 at http://www.nasdaq.com/screening/company-list.aspx. Delta hedging definition. (2015). [Online]. Retrieved 23 February 2015 at www.investopedia.com/terms/d/deltahedging.asp. Gwartney JD, Stroup RL, & Sobel RS (2008). Economics: Private and public choice. US: Thomson Learning, Inc. Kaeppel J. (2011). How to profit with long straddles. [Online]. Retrieved 23 February 2015 at http://www.forbes.com/sites/investor/2011/09/12/how-to-profit-with-long-straddles/. Kinahan JJ. (2013). Don’t choke on this options strategy: The strangle. [Online]. Retrieved 23 February 2015 at http://www.forbes.com/sites/jjkinahan/2013/03/04/dont-choke-on-this-options-strategy-the-strangle/. Mergers and acquisitions involving UK companies (2011). [Online Article]. . Read More