Technical analysis operates on historical data, which means that analysts use types of charts, graphs representing the past price stock to anticipate the future price trends.. Finally, t
INTRODUCTION
General overview of securities market
1.1.1 Historical development of stock market in the world
Securities market was established in a spontaneous and primitive way in the early of fifteenth century On May 17, 1792 in Wall Street, twenty-four brokers and merchants officially signed Buttonwood to found New York securities market (NYSE) In this meeting, they decided to meet each other to implement stocks and bonds transactions Nowadays, NYSE index has been considered as one of the most essential index to evaluate global securities market AMEX (American stock market), NYSE and thousands of other stock markets contributed a considerably important part into national and global economy
Securities market grew rapidly in both the quantity and quality with increases in number of participants and many other aspects Initially, means of exchange was very simple such as hand signatures and confirmation letters of customers Currently, thanks to the development of science and technology, trading methods at stock exchanges are progressively modified in accordance with the speed and volume to advance efficiency and trading quality For example, these methods change from manual dealing combination with computer-based trades into entirely automated trading platforms
The development of stock market has experienced many ups and downs In history, there were two major crises recorded which are when major stock markets in the
US, Western Europe, Northern Europe, Japan collapsed in just a few hours on
“Black Thursday”, October 29,1929 and “Black Monday” on October 19,1987 However, the stock market has now stabilized and developed through crises with more than 160 stock exchanges around the world It can be said that the stock market has become an indispensable financial institution in the market-based economy, especially in developing countries that need to attract large and long-term capital sources for the national economy
The development of Vietnam stock market was highlighted by the establishment of the State Securities Commission of Vietnam (SSC) on November 28, 1996 under Government Decree No.75/CP The SSC is an entity with full functions, responsibilities and authority of a state management agency on securities Two years later, Ho Chi Minh Securities Trading Center was founded under Decision No.127/1998/QD-TTg on July 11, 1998 and officially opened the first trading session on July 28, 2000 After that, the center was renamed Ho Chi Minh Stock Exchange (HOSE) according to Decision No 599/QD-TTg dated May 11, 2007 of the Prime Minister Besides, the Hanoi Stock Exchange (HNX) was set up on January 2, 2009 following the Prime Minister’s Decision No.01/2009/QD-TTg on the background of the transformation and reorganization of the Hanoi Securities Trading Center after four years of operation
After twenty-year of establishment and development, Vietnam stock market has been gaining the position in market economy as an essential and efficient capital utilization channel and as a window of integration with international financial and monetary markets
According to the statistics of State Securities Commission (SSC), Vietnam stock market has got outstanding achievements for the past twenty years First of all, the stock market has continuously strengthened its structure and grown to become a large-scale market in the region Besides, it also partly helped national financial system develop in a balanced and consistent direction Furthermore, professional and financial capacity of stock exchange companies and securities service providers have been enhanced significantly, which ameliorates service quality, manages investment risks and encourages relationship between investors and corporations In the past few years, intermediaries including securities companies have paid more attention to upgrade information technology system and database in order to meet the demand of international integration Stock exchange made a significant contribution to the equitization of state-owned enterprises, diversified products and services matching international standards and practices
Twenty years contributed to the strong development of the Vietnam stock market in the region, from the primitive and nascent market to a significant one (as compared with GDP) However, during that development, the market has still some shortcomings that need to recover
In Vietnam, enterprises’ information disclosure is discretionary, and even confidential information is also accessible to the public As a result, a number of investor, especially small ones will suffer from loss
Vietnam’s policies are constantly changing and impossible to forecast, which causes many difficulties for investors and corporations Although the law of securities was born, it contributed to promoting the healthier development of the market However, the legal framework governing the stock market in particular and the financial market in general is still incomplete
Vietnamese stock market still has many drawbacks that some subjects exploit for
“price setting” Some of explanations are that order execution and work information must be transferred through transactions prior to their public release
When the market is developing rapidly, many people who do not even have economic and financial knowledge get involved in investing Furthermore, in Vietnamese stock market, crowd psychology is quite evident
Currently, Vietnam stock market has just had two main indexes, which are VN- Index and HNX-Index
The problem in stakeholders’ level of experience and knowledge
Vietnam Stock market is new and it takes time to train staff of exchanges, brokers and investors Nonetheless, the problem required to be handled is that the awareness of participants in the market is not high
1.1.3 VPS Securities Joint Stock Company
VPS, founded in 2006, is one of the largest securities companies in Vietnam with a charter capital of 3,500 billion VND and total assets of 10,274 billion VND as of June 30, 2019.
Objectives of the study
Technical tools have become indispensable with stock investors, stock issuers and brokers in securities companies They play an essential role in making right decision and reducing risks for all parties in the securities market The research concentrates on evaluating the effectiveness of technical analysis, identifying the drawbacks after implementation, then proposing solutions to handle them and providing theoretical additions for this method.
Significance of the study
The Vietnamese securities market had promising early successes, drawing rising numbers of domestic and foreign investors over the course of its twenty-year growth In the early stages, investors and analysts in securities companies decided to invest mainly based on emotion At the same time, the use of analytical tools was also constrained, which led to the delay in the development of Vietnam stock market
Nowadays, the Vietnam economy is becoming more and more prosperous, which makes the securities market gradually perfect The number of investors, executives and experts who use analysis methods to conduct transactions is increasing Besides, technical analysis together with fundamental analysis methods have been widely applied in stock markets for decades, especially by Vietnamese investors Therefore, the advancement of technical methods is significant, particularly in securities companies In the past few years, the effectiveness and correctness of these methods have still been a top-ranking concern for investors and specialists to make accurate decisions Consequently, the study will figure out the benefits and the drawbacks of technical analysis methods with the purpose of using them effectively
Definition of key terms
Securities market is a market in which parties buy, sell, transfer and exchange securities for the purpose of making profit However, in modern economy, stock exchange is considered as a place to conduct medium and long-term securities trading activities
Functions of securities market are mobilizing investment capital, providing public investment environment, increasing stock liquidity and evaluating firm operation
Securities Company, one of the main subjects in stock market, is a business that engages in one or more of the following activities including underwriting, proprietary investing, brokerage, investment fund management and investment consulting To carry out each activity, the firm requires a certain amount of capital and the approval of the competent authority
This is a method for analyzing fluctuations in supply and demand for stocks based on charts, graphs of price movements and trading volume of shares in order to provide immediate response to the market This means that the results relatively tell analysts the time to purchase, sell or hold stocks In short, technical analysis method is using price happenings and trading volume in the past to anticipate the future price trends
LITERATURE REVIEW
Overview of technical analysis
Technical analysis originated from Charles Dow, who was the founder of Dow Jones and Company and the first editor of The Wall Street Journal After years of research, he put forth avarage index of the eleven most valuable stocks on the US market in 1884 He was a person who laid the first brick in the formation of Dow Theory- Basis of technical analysis A number of noteworthy researchers including William P.Hamilyon, Robert Rhea, Edson Gould and John Magee futher contributed to Dow Theory to form its basis Technical analysis operates from the assumption that historical trading activity and price changes of security can become valuable indicators of the security’s future price movement when combined with applicable investment or trading rules Nowadays, the method is used widely by both professional analysts and retail traders and it is considered as useful tools to support investment effectively
General description of technical analysis
Unlike fundamental analysis, which evaluates a security value based on business result such as revenue, earnings and dividends, technical analysis concentrates on studying price and volume Technical instruments are used to assess how the demand and supply of a security can influence on the changes in its price and volume Investors apply technical analysis to generate short-term trading signals from different types of charts, but it may also enhance the evaluation of the strength or weakness of a security as compared to the wider markets or one of its sectors
Technical analysis can be applied on any security with historical trading data This method is based on the premise that historical trade activities and price adjustments of a stock may be useful indicators of expected price movements when combination with appropriate investing or trading rules Professional analysts often use technical analysis together with other forms of research Retail traders may decide exclusively on the basis of security pricing charts and related figures, but security analysts rarely restricted their research to fundamental or technical analysis alone
Technical analysis seeks to predict the price fluctuations of almost every tradable instrument affected by supply and demand including stocks, bonds, futures and currency pairs In the market, researchers have created hundreds of patterns and signals to facilitate the technical analysis trading Besides, technical analysis have also developed several forms of trading systems to support them anticipate and trade on price movements Some indices pay more attention to identify the current market trends like support and resistance, while others are focused on determining the strength of a trend and the possibility of its continuation Technical analysis indicators and charting patterns are commonly applied comprising of trendlines, channels, moving averages and momentum indicators
Primary assumptions of technical analysis
Charles Dow published a series of editorials discussing technical analysis theory Two basic assumptions in his writings established the framework for technical analysis trading The first one is that “market are efficient with values representing factors that influence a security’s price” Another one is “even random market price movements appear to move in identifiable patterns and trends that tend to repeat over time” Currently, three typical assumptions, built on Dow’s work, are accepted by analysts for the discipline
Based on the premise of the efficient markets hypothesis that all relevant information is already reflected by prices, technical analysts believe that it is essential to understand what investors think about that information Besides, any other theory or analysis that gains acceptance must initially comprehend and acknowledge this assumption According to technical analysts, any factor that has the ability to affect price is clearly reflected in market volatility (changes in supply and demand)
Professional analysts claim that there are three trends of price: uptrend, downtrend and side way In fact, technical analysis can be applied to identify these trends
8 before based on descriptive graphs The purpose of this method is to find out the repetition of price movements that existed in the past, which helps investors take advantages of previous experience and make appropriate decision
History tends to repeat itself
Technical analysts believe that history tends to repeat itself The repetitive nature of price movements is often attributed to market psychology, which appears to be very predictable dependent on emotions such as fear or excitement Technical analysis uses chart patterns to analyze these emotions and subsequent market movements to understand trends.
Theoretical basis of technical analysis
Dow believed that the stock market was a reliable measure of overall business conditions within the economy and that by analyzing the overall market, one could accurately gauge those conditions and identify the direction of major market trends and individual stocks
The Dow Theory is a technical framework that predicts the market is in an uptrend if one of its averages advances above a previous important high and accompanied or followed by a similar advance in the other averages The theory is predicted on the notion that the market discounts everything in a way consistent with the efficient markets hypothesis In such a paradigm, different market indicators must confirm each other in term of price and volume until trends reverse
There are six main components to the Dow Theory
The stock market indices discount everything in public domain, both known and unknown things When an unexpected or unpredictable event occurs suddenly, the market indexes instantly recalibrate themselves to represent the correct value
There are three primary kinds of market trends
They are primary trends, secondary trends and minor trends The primary trends last a year or more like a bull or bear market In these trends, the market also experiences secondary trends which last from three weeks to three months These trends happen against the primary ones such as a pullback in a bull market or a rally in a bear market Finally, the minor trends occurs in a short time, less than three weeks
Primary trends have three phases
In a bull market, three phases include the accumulation phase, the public participation phase, and the excess phase In a bear market, they are called the distribution phase, the public participation phase, and the panic (or despair) phase
Indices must confirm each other
To establish a trend, Dow assumes indices or market averages must confirm each other This means that all indices used by analysts have to provide the same results, which helps them identify the market trends more accurately
Volume must confirm the trend
If the price is moving in the direction of primary trend, volume should rise, and if it moves in the opposite direction, volume should decrease Low volume is a signal of a weakness in the trend
Trends persist until a clear reversal occurs
Reversals in primary trends can be misleading with secondary trends It’s difficult to define an uptrend in a bear market as a reversal or a short-term rally that would be accompanied by even lower lows Consequently, the Dow Theory requires caution until a reversal is confirmed
The Elliot Wave Theory, which was developed by Ralph Nelson Elliott in the 1930s, refers to a theory in technical analysis used to describe price movement in the financial market This hypothesis claims that stock price movements can be predictable because they shift in repeating up-and-down patterns called waves
Besides, it identifies a number of different types of waves, including motive waves, impulse waves, and corrective waves; however, impulse and corrective waves are used more popularly In fact, Elliott believed that all off human’s activities, not just the stock market, were impacted by these identifiable series of waves
The primary notions of the Elliot Wave Theory are described below
- Action is followed by reaction
- The dominant pattern is accompanied by five waves in the main direction, followed by three corrective waves (a 5-3 move)
- A 5-3 move completes a cycle Then it becomes two subdivisions of the next higher 5-3 wave
- The fundamental 5-3 pattern remains unchanged although the time period of each can vary
According to the efficient market theory, security prices accurately and almost instantly represent all information and expectations It claims that investors cannot reliably outperform the stock market due to the random nature of information and the fact that prices respond and change almost promptly to reflect the latest information As a result, it means that the market values all securities correctly at any given time The result is that securities cannot be overpriced or underpriced for a long enough period of time to profit therefrom.
Comparison of fundamental analysis and technical analysis
Fundamental and technical analysis are two typical methods for investors to research and forecast future stock market Regarding fundamental analysis, it assesses all factors that have capability of influencing on the value of the security (including macroeconomic and organization-specific factors) Generally, the method examines security to identify its intrinsic value for long-term investment opportunities On the other hands, technical analysis is based on historical stock price and volume data to predict the future In this method, analysts use charts, graphs and trading volume to detect trading opportunities with positive expectancy
It defines what a stock will do in coming time
Financial statements are the primary source of data for fundamental analysts, whereas charts of market movements are the almost sole source of information for technical ones In fundamental analysis, the intrinsic value of the stock is estimated by analyzing the income statements, balance sheets and the statements of cash flow
In this approach, the investment decision is based on logic that if the stock trades at a price lower than its estimated intrinsic value, it is a good investment However, technical analysts use more complicated information in their analysis than just the evidence contained in the financial statements They believe that the stock price’s charts provide all of information required to understand a security These discrepancies are obviously expressed through the basic principle assumption of fundamental analysis that the market is not properly valuing the share at any given time In contrast to fundamental analysts, who conclude that all factors need time to affect the stock price, technical analysts examine all external factors immediately mirrored the price The essence of the technical analysis makes it helpful for short- term trading, so it used mostly for trading purposes, while fundamental analysis is primarily used for investment
Furthermore, fundamental analysis usually uses longer periods to analyze stocks than technical analysis When evaluating a stock, technical analysts collects data in short periods which may be hours, days, weeks or months, while fundamental analysis uses periods of several years As a result, fundamental analysis is appropriate for investors who are attempting to choose stocks whose value will rise in the future They assume that if they pick the rights stocks, their price will increase at anytime, although it takes a long time to happen
The time difference between two types of analysis is not only shown in their short- term or long-term approach, but also in their purpose Generally, the purpose of fundamental analysis is investment and the goal of technical analysis is trading Specifically, investors usually apply fundamental analysis if they buy and hold stocks for a long period of time, but technical analysis is beneficial for traders who want to gain short-term profits
Primary tools in technical analysis
Technical analysis is dependent on almost completely on the analysis of price and volume The fields which determine a security price and volume are explained below
Open - This is the price of the first trade for the period like the first trade of the day When analyzing daily data, the Open is especially important since it is the consensus price after all interested parties were able to “sleep on it”
High – this is the highest price that the security traded during the period It is the point at which there were more sellers than buyers This means that there are always buyers willing to buy at lower price, but the High represents the highest price buyers were willing to buy
Low – this is the lowest price that the security traded during the period Contrary to the High, it is the point at which there were more buyers than seller
Close – this is the last price that the security traded during the period Because of its availability, the Close is the most often used price for analysis The relationship between the Open and the Close are significant with most technicians This relationship is emphasized in candlestick charts
Volume – this is the number of shares (or contracts) that were traded during the period
A line chart is a graphical representation of an asset’s past price movement that uses a continuous line to match a sequence of data points This is the most popular types of charts used in finance and normally, it only shows the closing price of a security over time Line charts enables analysts to use on any timeframe, but day-to-day price fluctuations are the most common These charts provide traders with an apparent picture of where the price of a stock has moved over a specific time
Moreover, line charts eliminate noise from less important points during the trading day such as the open, low and high because they only give information referred to closing prices Line charts become popular for users due to two main advantages that are clarity and easy-to-use, but the form of chart may not provide enough price information for traders to make investment decision
Bar charts show a number of price bars over time and each bar depicts the movement of prices within certain time period In the other words, a bar chart illustrates the open, high, low and close prices of a security over a specific of time Technical analysts take advantages of bar chart to keep a close watch on price actions, which helps traders make timely decisions
In a bar chart, a vertical line marks the highest and lowest price reached in the period A small horizontal line to the left of the vertical line indicates the opening price and that to the right is the closing price To be more obvious, bar charts can be coded by different colors Color coding depends on the position of the opening and the closing prices, which be colored black or green if the close is above the open and be colored red if in contrary position
Figure 1: Example of a bar chart
Candlesticks developed hundreds of years by Japanese rice merchants and traders to monitor the market prices and daily momentum A candlestick is a form of price chart used in technical analysis to demonstrate the high, low, open and closing prices of a security for an explicit time
The shadows of candlesticks provide the highest and lowest price during the day Technical analysts use candlesticks to identify the time to enter or exit trading because they reflect the influence of investor sentiment on security prices Besides, the candlesticks are also used to determine trading patterns which make it easier for technical analysis to set up a trade The patterns are created by arranging two or more candles in a certain order However, sometimes, just a single candlestick pattern also shows powerful trading signals Therefore, candlesticks are divided into single candlesticks and multiple candlesticks
A trend is the general direction of a market or the direction the prices are moving in Trends are created by peaks and troughs The direction of those peaks and troughs establish a market trend There are three directions of trend, which are uptrend, down trend and sideways According to Dow Theory, trend lengths included three types: primary, secondary and minor trends When analyzing a stock, analysts
15 realize the trend by drawing a line that connects two or more price points, which is called trend line
There are three main groups of technical indicators: trending indicators, oscillating indicators and volume-based indicators
- Moving Average Convergence Divergence (MACD)
In technical analysis, the lines connecting the important price peaks and bottoms are called support and resistance Traders usually use these lines to determine the point to enter the market In general, support and resistance levels represent the area where analysts are able to anticipate a price reaction of an asset The support and resistance levels are a direct result of differences in supply and demand As an overall rule, the price rises when there are more buyers than seller and declines when there are more buyers The reliability of a level depends on the rate at which the prices reach a level and greater reliability means improved ability to forecast potential market changes
Support or support level refers to price level that an asset is unable to decrease below within a specific period, which is a point that investors tend to buy or enter into a stock Prices frequently stop falling and bounce back up at support level
Resistance, or a resistance level is the price at which an asset’s price is under pressure on its way up by the appearance of a growing number of sellers who wish to sell at that price Prices stop rising and take a dip back at the resistance level
Fibonacci numbers are used to generate technical indicators using a mathematical sequence developed by the Italian mathematician (Leonardo Fibonacci), generally well-known for the name “Fibonacci” The series of numbers, starting at zero and one, is formed by adding the previous two numbers: 1, 1, 2, 3, 5, 8, 13, 21, etc.
Previous research
Together with the development of security market, the methods of analysis are concerned more carefully by analysts, investors and traders When the technical analysis appeared as as a technique to support investing, a number of researchers who were suspicious about its efficiency conducted studies to evaluate the effectiveness of this method through different methodologies
In the research of Josip Arneric, Elza Jurun and Snjezana Pivac, they described that the purpose of technical analysis is to find out the price movement whereas fundamental analysis is applied to predict value by looking at the fundamentals of a particular company They concentrated mainly on technical analysis and determined that trend can be two types on the foundation of either time structure or general direction Their research used exponential smoothing methodology by using simple moving average (SMA), Bollinger bands and Relative Strength Index (RSI) to indicate the difference in the long-term and short-term strategies through finding out the reliable signals to buy and sell
Frankel and Froot noted that market professionals tend to apply technical analysis in forecasting the market Their study discussed that the useful principle of technical analysis to define trends and the techniques of moving averages, relative strength index (RSI) by applying them on Singapore Stock exchange The result of this study showed that the RSI is only good in non-trending environment and the simple moving averages and RSI will provide good results excluding the transaction costs
The research of Maneul Ammann, Matthias Rekate and Rico Von Wyss showed an outperformance of technical analysis They agued that the extent of academic acceptance of using technical analysis is not so good as compared to its practical application The study discussed that technical analysis is connected with the forces of demand, supply and sentiments in the market so it is helpful in short-term investment
Treynor and Ferguson has established the first theoretical model to apply technical analysis, and the model describes that investors choose strategies to hold a security for a particular time period either long or short to get benefit from it later after they receive private information at specific point of time The model concludes that this private information is useful only with the combination of some additional or further information
Oscler and Chang (1995) in their research work on application of technical analysis by using “head and shoulders” and its results pointed out that the charts technique also give partially fruitful predictions
The article of William Brock, Josef LaKonishhok and Blake LeBaron (1992) explored moving averages and support and resistance to identify signals in short or long period of time and the examine the high and low hits of prices Their research also claimed that technical analysis is helpful in anticipating future price movements by looking at past prices and their trends; besides, the fluctuations of demand and supply are also provided in the charts or graphs
In general, the above researches primarily indicate that technical analysis is effective in investment and trading However, the success in using this methods depends mainly on the usage (one or more indicators), the knowledge of users and the typical features of stock market
RESEARCH METHODOLOGY
Locale of the study
The research is implemented at Banking Academy of Vietnam and the internship company The relevant knowledge is accumulated during the learning process at Banking Academy and through practical application in VPS Company The study will provide a specific view of technical analysis such as its usage and its effectiveness The study can be useful with new investors or those who are interested in technical analysis Besides, this topic is not new to Vietnamese investors, but there are still many misconceptions about this method, which may affect investment efficiency The information like statistics, charts or technical indicators will be collected and analyzed from popular websites which are usually used by staff in this company.
Research design
In addition to the preface, conclusions, appendices and references, the thesis is divided into five chapters
Chapter IV: Findings and discussions
Data gathering procedure
The systematic approach is to gather and measure information from a number of sources to get a complete and accurate picture of an area of interest In the thesis, the information and knowledge is collected from reliable websites such as State Securities Committee, annual reports of Ho Chi Minh Stock Exchange or in official pages of securities companies
To provide a more physical and objective perspective, the study will use technical analysis to examine the price of a specific security based on its historical data The
19 main subject is VN-Index, a typical index in Vietnam security market In investment, following security index is one of the most important thing for investors or traders because it reflect directly the current situation of the economy in general and security market in particular, which has influence on their sell or buy decisions
The VN-Index is a stock index of the Ho Chi Minh Stock Exchange (HOSE) and represents all stocks listed on HOSE The VN-Index plays an important role with Vietnam security market as well as traders
- Measures the performance of the stock market
- Reflect the strength of national economy
- Help investors evaluate the stocks’ quality
Figure 3: VN-Index in recent years
Finally, to have more correct results, the study will use evaluation methods to examine other aspects of technical analysis First of all, the effectiveness of technical analysis as well as each type of indicator is reflected by total of profits that investors gain when using this method The profits are identified by the difference between sell prices and buy prices Secondly, the study need to assess the correctness of signals provided by technical analysis
Research instrument
Technical analysis method will be applied to analyze VN-Index based on its historical data Three technical indicators that are mainly used are Moving Average (MA), Relative Strength Index (RSI) and Stochastic
Moving Average is the arithmetic average of prices of a stock over the most recent period of n days
P: closing price from day t-i to day t i: from 0 to n-1 n: the number of days
The Moving Average represents a prediction from the previous security prices in the past An increasing Moving Average points out that prices have tendency to be higher on average over time The trading signal by using MA is estimated when the current price crosses the MA line A “buy” signal to traders is determined if the current day’s closing price is above the MA line, which shows that current demand is higher than before In contrast, if the current closing price is below the MA line, a
“sell” signal will be defined
The index, developed by J Welles Wilder, measures the strength of prices for the most recent period of n day
U t : the average of closing prices in days when price increase
D t : the average of closing prices in days when price decrease t: ranges from 0 to n-1
The usefulness of RSI is perceived when it displays trends or breakouts earlier or more clearly than simple price charting When RSI is at a high level (more than 70), the stock is in overbought range, which provides a signal for traders sell the stock
On the other hand, a low RSI value (from 30 to 70) can be considered an oversold condition and traders might buy the stock at this level
The indicator compares the value of current price with a sequence of price during n days trading period
A “buy” signal is provided at the point where the K line cuts the Z line on the Stochastic graph and the K line goes up on the Z line ( both of these lines move up) and the opposite direction of these lines will give trader a “sell” signal
In the study, the website, Fireant.vn, is used for technical analysis and took historical data of VN-Index To evaluate more exactly, some other indicators will be also applied apart from three above indicators
To apply technical analysis in VN-Index objectively and determine the effectiveness of this method, a requirement is to standardize the technical analysis to eliminate the subjective factors coming from other investors At the same time, it
22 is necessary to get rid of factors that are not related to technical analysis affecting the trading results Specifically, some assumptions are given:
- Investors investing by stock portfolio have the same number shares and stock proportion as in the basket for calculation VN-Index
- Traders use only one type of indicator
- When investors receive signal from the technical analysis, they behaves immediately and assumes that the order is executed instantly
- Investors always trade with a constant amount of shares
- There are no dividends and transaction costs, regardless of the time value of money: in order to assess clearly the usefulness of technical analysis, the study assumes no dividends distribution, no transaction costs and does not account for the time value of capital in measuring the profit because these factors may have impact on investment efficiency
FINDINGS AND DISCUSSION
Disadvantages of using fundamental analysis and the efficient market
Many investors do not have enough knowledge and experience to value based on fundamental analysis Those who follow the fundamental analysis ague that those who lack the knowledge and experience to be able to use this method must apply technical analysis Lukas Menkhoff proved that above argument is wrong and using technical analysis also requires certain knowledge and experience However, it is undeniable that only knowledgeable people can use fundamental analysis effectively In fact, Vietnam stock market lacks a team of qualified and experienced officers, employees, specialists and investors Therefore, investors tend to invest based on sentiment or psychology which is main subject of technical analysis
While the subject of fundamental analysis is primary information from financial statement and the efficient market theory claims that all information is reflected in prices, transparency in Vietnam stock market is low as well as information risk is high As mentioned, the subject of fundamental analysis is macro information, industry information, company information and stock information Hence, the quality of these information directly influences on the results of this method Nevertheless, in Vietnam stock market, the transparency is not high and the information disclosure schedule is not obvious, which leads to many potential information risks and policy risks It is risky if false information is included in the analysis and then this results in mispricing At the same time, this disadvantage contradict the principle of the efficient market theory
Determining the exact discount rate (expected return) is difficult and many studies have demonstrated that prices in reality fluctuate more than predicted prices Determination of expected return depends on each investor and the basic interest rate in the market In recent years, the interest rate in Vietnam market has changed frequently, which makes it difficult to identify the expected yield
Characteristics of Vietnam security market are consistent with technical
Initially, a number of investors who study technical analysis believe that the method is not effective in Vietnam because at that time, the market has not yet developed perfectly and a few people apply it for trading When signals supplied by tools of technical analysis do not take advantages of, a price-chasing effect will not be created As a consequence, price trends mirroring clearly investors’ sentiment can not formed, which leads to waste a fundamental foundation of technical analysis for investors to gain profits In reality, that the few number of people uses this method would be benefit those who understand it well enough to make a significant profit from those do not This is because of the fact that price patterns still continue and can be well represented by technical analysis even though it is not widely applied Moreover, the market always exists in psychological states called anchors, defenders and standard patterns To put it plainly, anchors and enemies are investors who are less likely to easily adjust their opinions on the market, on each type of stock and on price level that they deem reasonable Therefore, whether traders comprehend technical analysis or not, whether they know what a trends line, resistance level is, trends and price levels are still important This weight remains in their investment decisions and technical analysis illustrates it apparently
Originating from the actual development of markets, there is a good chance for technical analysis to grow widely in Vietnam Vietnam security market fluctuates quickly, so technical analysis is only considered a new method as other analysis method to support each other In other word, analysts can not assert that technical analysis is always better than other methods
The specific nature of Vietnam stock market and its effects on the use of technical analysis
In some situations, prices does not reflect all the actions of the market
Stock prices at any given time indicate the psychology of multiple investors Their sentiment reflects their expectation or disappointment for the stocks based on trends and news in the market As mentioned in chapter II, indicators in technical analysis
25 are established by correlations between stock prices or volume In Vietnam security market, in many cases, prices do not present enough relation between supply and demand Definitely, when the demand and supply is overwhelming, the pressure to increase or decrease the price is intense and the narrow amplitude of volatility makes it difficult for investors to raise the buying prices or lower the selling prices above the ceiling or floor prices This suppresses the strength of investor’s sentiment, which causes artificial scarcity when the bid or offer price does not meet the expectations of investors
Influence from the delay of the price
The Vietnam market has a narrow band They have considerable impact on a security ability to represent price movements The price must be charged over several sessions of steep increase or decrease, especially in the case of sharp purchasing or selling competition to help demand and supply balance Technical indicators are also influenced by slow prices Investors who use a lot of these indicators but do not pay adequate attention to the momentum patterns, in many cases they will not notice all the potential risks of the market
There are some typical characteristics of the Vietnam stock market which are consistent with technical analysis First and foremost, one of the good condition to apply technical analysis in Vietnam security market is that the majority of enterprises in Vietnam are small and medium ones Another feature is Vietnamese investors usually have intention of investing in short-term and medium term Most indicators give the most exact signals in short-term period Finally, Vietnam investors’ sentiment become a crucial factor that influences the stock price.
Information research analysis
The research concentrates on historical data of VN-Index from 2016-2020 After using Fireant.vn with three indicators (MA, RSI and Stochastic) to analyze historical data of VN-Index and receive “buy” or “sell” signal, the thesis collects some useful information With original assumption that investors carry out immediately after they receive signal from technical analysis, each indicator of
26 technical analysis provides different signals, which leads to the differences in total of profits
The easiest way for MA is using only one line, but this is mainly beneficial for short-term and medium-term investors MA lines define or indicate the signal that a new trend has started or an old trend has ended or reversed Once a MA is used, buy signal is that price moves up above the MA and sell signal is that price moves below the MA For example, MA 20 is applied to identify the market trends
Figure 4: Example of using MA 20
It can be seen from the graph, the price goes up and cuts the MA 20 (yellow line), which informs investors the increasing trend of the market In fact, the price increased from 672.21 in December 2016 to 1200.24 in April 2018 At the same time, a reversal occurred and the prices began to plummet Signal provided by the
MA 20 was that it went down and above the price chart, but this signal was later than the time prices started falling
To increase correctness level, three moving average lines are used including two short-term lines (MA 9 and MA 20) and one long-term line (MA 200) Investors receive sell signals and buy signals at the intersection of short-term moving average and long-term average Specifically, if the short-term MA crosses the long-term MA from bottom to top, it typically predicts a buy signal, and vice versa
Figure 5: Analysis with Moving Average
Three MA lines are marked by three colors including purple, yellow and black, which demonstrate MA 200, MA 20 and MA 9 respectively According to the original theory, when the MA 9 crosses the MA 20 and both of lines are above the
MA 200, the market will be predicted to increase In fact, the price grew continuously and created peaks at price level 1200.24 on April 2018 Points of intersection when MA 9 cut MA 20 and went up were considered the point of purchasing On the contrary, MA 9 cut MA 20 and went down, it’s necessary for investors to sell the stock because the market experienced a decrease However, both of lines were above MA 200, so they still could continue to hold the stock Especially, that MA 9 and MA 20 crosses MA 200 would provide analysts with the significant decrease and they should sell the stock at this time
The specific result is illustrated in following tables:
Buy Time Sell Time Profit
Table 1: The result of using MA 9
Buy Time Sell Time Profit
Table 2: The result of using MA 20
MA 9 and MA 20 are usually used for short-term traders In general, it can be seen from two above tables, MA lines generated buy and sell signals quite exactly and help investors gain some profits There are some notes when using MA that investors should pay attention to MA is not intended to get them in at the exact bottom or out at the exact top of the market Rather, it is designed to keep investors in line with the security price pattern by buying in a minute after the stock price bottoms and selling shortly after it tops The most common MA is 39-week or 200- day because it has an ideal track record in timing the long-term market cycles According to Joseph E Granville, a genius of technical analysis, there are eight tips for using successfully MA 200 for long-term trading
- If MA 200 flattens or rises after a previous decline, and the price line enters the MA 200 on the upside, this is a buy signal
- If the stock price falls below MA 200 while the MA 200 still rising, this is also considered a buying opportunity
- If the stock price is above the MA 200 (bullish) and the price is decreasing towards the MA but not lower and starts to increase again, this is a buy signal
- If the stock price declines sharply below the falling MA and tends to move back to the MA, the stock can be bought for this short-term technical increase
- If the MA 200 flattens out after a previous gain or is falling and the price penetrates that line on the downside, this is a major sell signal
- If the price rises above the MA 200 while the MA remains down, it is a selling chance
- If the price is below the MA 200 and moving up towards the MA but fails to break through and start falling again, this is a sell signal
- If the stock price rises quickly above the MA and tends to move back to the
MA, this is a sell signal
The RSI, by default, calculates market fluctuations over 14 numerical time periods
(14 days in daily chart, 14 hours on an hourly chart and etc) The index is determined by dividing the average of the rising prices by the average of falling prices over the measurement duration, and then plotting the metric on a 0 to 100 scale
As mentioned, the RSI is a momentum indicator, which is a type of instrument for measuring the rate of price movements In term of theory, three main signals are provided by the RSI:
- Overbought: when the RSI is greater than 70 (raging from 70 to 100), it indicates that the market is overbought and it usually happens in an uptrend and is a signal for a market reversal
- Oversold: the RSI is smaller than 30, it usually occurs in a downtrend and is a signal for a market reversal
- Divergence: this includes RSI Bullish and RSI Bearish divergence
The following picture shows the result of using RSI to analyze stock price and market trends
Figure 6: The result of using RSI
It can be seen from the chart, investors can easily define the time that they should buy or sell the stock The market trend is sideways when the RSI is in 45-
55 scale Normally, RSI will give investors sooner signals than MA, so the accuracy of RSI is slightly higher than MA Some excellent investors only use this indicator and trend lines for trading and gain better profits According practical experience, when using the RSI, investors should buy in the oversold area and sell in the overbought area for maximum profits In overbought area, analysts do not encourage investors to buy the stock because of high risks At that time, it cannot be sure that the uptrend will be continue or a reversal will occurs On the contrary, in oversold area, investors should not trade since the prices in this area is very low, which leads to a big loss
Overbought points are shown specifically in following table
June 26, 2017 775.39 July 31, 2017 787.61 November 27, 2017 958.73 January 22, 2018 1117.63 April 2, 2018 1178.75
Table 3: Overbought identified by RSI
Investors can apply RSI together with trend lines to determine support level and resistance level There is an instance of this use, VNM- security of Vietnam Dairy Products Joint Stock Company
Figure 7: Example of resistance and support
When the RSI moves around resistance and support level, investors can continue to hold the stock and when it moves out of support level, they should exit the market
As a usual rule, it is better for investors to buy at support level and sell at resistance level
Price and RSI divergence or convergence is also a way to identify trends of the market It can be easily seen the divergence of VCB security, a security of Joint Stock Commercial Bank for Foreign Trade of Vietnam (Vietcombank)
Figture 8: Example of VCB divergence
The divergence is demonstrated through the opposite direction of RSI and price of VCB It gives the signal for the price reversal from bullish to bearish
Another specific instance of price and RSI convergence is indicated in VNM’s price chart
Ficgure 9: The price and RSI convergence
From the picture, two green lines show that VNM’s price is adjusting to go down and the RSI also tends to decrease As a usual rule, it is normal for the RSI and the price line to move in the same direction However, a noticeable thing from two blue
Comments on the efficiency of technical analysis
4.4.1 Technical analysis is not always effective in all situations
Overall, no single analysis method can provide investors with total precision Technical indicators may at the same time give different buy or sell signals, and some indicators provide signals sooner or later than others As a result, investors will gain the other amount of profit for each indicators For example, from December 1, 2007 to October 30, 2008, when investors used the MA 20, they lost 36.8 points because this indicator indicated to sell at a lower price than buying In conclusion, technical analysis does not always provide investors with absolute accuracy, sometimes it can make investor suffer a loss Furthermore, each technical
36 indicator is effective in one situation but less effective in another, especially periods when the market goes up or down sharply and sideways
4.4.2 Reasons of aberrant predictions when using technical analysis
For three indicators including MA, RSI and Stochastic, they will give both true and false signals This means that there is no indicator completely correct in all cases The reasons for aberrant signals will be presented carefully An important thing is that wrong signals mainly happened in 2006-2010, so statistics will be collected and analyzed in this period
Firstly, when the market trend rises marginally, the buy signal is usually given when the price is near the top, resulting in a high purchase price Besides, when the market trend decreases slightly, the sell signal is usually given as the price near the bottom, which leads to sell stock at a low price When the market increases slightly, the point where the price line crosses the MA and the price rises (the buy signal) is greater than the point where the price line cuts the MA and the price falls (a sell signal)
MA 20 gave two wrong signals Specifically, when buying on September 21, 2007 and selling on November 16, 2007, investors suffered a loss of 48.18 Second one is when purchased on August 15, 2008 and sold on October 13, 2008 had a loss of 36.8
Figure 12: The wrong signals of MA 20
It is crucial to understand that if the uptrend is strong, the price line will cut the MA and then continue to climb for a long time The sale price is always higher than the initial purchase price although after the price line begins to decline and goes down and the MA drops even more If the price just rises marginally, the MA tends to give a late signal on the chart, which indicates that the MA has issued the incorrect buy and sell signals To sum up, investors should use MA when the market is in uptrend or downtrend obviously
Now that the RSI often reaches the threshold of overbought and oversold very early when the market is in a strong direction This means that investors will lose a huge amount of profits when the market increases rapidly and struggle to cut a large loss when the market declines significantly
Figure 13: The early sell signal of RSI
One of the common mistakes of new users to RSI is misunderstanding how to trade overbought and oversold This mistake occurs when the stock has just enter the overbought status, investors have conducted a selling strategy and it has just entered oversold zone, they has implemented a buying strategy This can result in missing a strong rally when the stock is overbought or the price will continue to fall despite the oversold signal Therefore, the right strategy is to wait for the RSI to completely get out of the overbought or oversold area and it is better to combine RSI with other indicators to increase reliability because sometimes the RSI has noisy signals itself
Figure 14: The common mistake of new users to RSI
Incorrect signals are given when the buy and sell signals on the stochastic curve provide in the opposite direction of price fluctuation on the price chart As a consequence, investors should use the stochastic signal when the stochastic direction (from the point of intersection) coincides with the market direction
Figure 15: The incorrect signal of Stochastic
There are two major mistakes that investors usually make when they use Stochastic The first error is that they rush to execute buy orders when the market is oversold and vice versa, implement sell orders when the market is overbought The second one is they think that the market will reverse as the divergence happens To sum up, both of the above mistakes refers to the fact that investors only base on signals given by indicators to make investment without paying attention to market trends Signals from Stochastic need to have consensus from other signals provided by RSI, trend lines or reversal candlestick patterns to identify accurate entry points A thorough understanding of this indicator can help investors avoid many risks and make more successful trades
CONCLUSION AND RECOMMENDATION
Summary
The most fundamental objective of this study is to concentrate on understanding technical analysis and the effects it can bring to investors in the stock market After applying technical analysis to analyze historical data of some specific stocks, typically VN-Index, the result of the research shows that technical analysis is a useful method to support investors to invest more effectively With original assumption that investors act immediately when they receive signals from technical tools, the method plays an important role in making investment decisions For example, it can help traders or users predict the price movements, market trends and the time they should buy, sell or hold the stock Although Vietnam stock market established and developed later than other market in the world resulting in the delayed appearance of technical analysis, the stock market has a number of suitable features to create good conditions to grow itself as well as its participants Besides, the study indicates that technical indicators do not always give correct signals, sometimes they provide wrong signals that make investors suffer a loss To minimize loss for investors and decrease the aberrant predictions of technical analysis, investors should apply many technical indicators at the same time, and only make decisions when all indicators used give the same results.
Limitations of the study
The time researching and completing the thesis only lasts for more than two months, the thesis also has some drawbacks First of all, the thesis has not yet provided the most accurate and complete view of research problem The time to get acquainted with securities is quite short (more than two months), which makes the author not fully understand each aspect of the research problem Moreover, specialized vocabulary is still limited, so sometimes, the expression on a certain problem is not clear and coherent causing confusion or misunderstanding for readers During the process of writing the thesis, it is difficult to find reliable information sources for references; accordingly, the knowledge in the thesis is not diversified enough to reflect the problem in many other fields Due to the short time
41 to interact with websites or tools related to security industry, the results of the research is not completely exact.
Recommendations
Currently, technical analysis becomes an indispensable method for all parties that take part in the stock market As mentioned, it is impossible to assert that technical indicators are absolutely accurate in all situations Therefore, investors need to prepare themselves a certain amount of knowledge about the methods and make intelligent decisions for their investment Next, the thesis will propose some suggestions to advance the effectiveness of technical analysis with expectation of helping investors as well as the stock market in general
Whether technical analysis is effective or not depends on the development of the stock market Therefore, the thesis will suggest some proposals to grow and perfect the Vietnam stock market First of all, it can be said that the stock market may not operate and thrive without a legal framework for the organizations and operation of stock market, so the State Security Committee needs to strengthen the legal framework For example, the competent authority should complete legal documents, mechanisms and policies for the growth of stock market as well as tighten regulations of illegal trading In addition, the stock market requires to continue restricting deeply in the direction of transparency and synchronization in accordance with international standards Finally, another proposal is that the SSC has better improve inspection and supervision activities of organizations or individuals participating in the stock market On the other hand, a key factor is that actively opening up, integrating with the region and the world Specifically, the purpose of this suggestion is to gradually open the market to foreign investors, ensure the control of capital outflow and inflow, then expand international cooperation activities in the fields of policy advice, legal advice and market development
In developed markets, with huge transaction scale, there are always a large number of investors with different interests and expectations about the stock price at any time Besides, trading price does not have any amplitude constraints and it has
42 enough breadth to completely reflect supply and demand situations in the market In the Vietnam market, there are two problems in stock price, which makes the relationship between supply and demand not fully mirror The first problem is that the transaction size is not large enough and the second is the narrow margin prevents the price from showing all actions in the market Both reasons are also accompanied by excessive lags and deviations of technical indicators Consequently, the technical indicators built on combination of price and trading volume are all distorted Therefore, it is necessary to handle problems related to supply and demand of securities, price and volume of transactions In additions, a subjective factor that affect directly the stock price is investors How to use technical analysis effectively requires investors to prepare themselves with sufficient and flexible knowledge and use types of chart and indicators at the same time to make the most reasonable decisions Some opinions are suggested to promote the usefulness of technical analysis First of all, investors should not buy the stocks when the market is decreasing sharply though the technical indicators give buy signals Besides, a combination of different indicators should be used at the same time to improve the accuracy Furthermore, investors can use technical analysis together with fundamental analysis Now that two methods operate on different principals, they can complement each other to assist investors have a more correct investment strategy Lastly, one of the key factors of a successful investment is that investors have to know how to correct wrong investment strategies in a timely way Technical analysts must always be wary of the false signals given by the chart and it is extremely significant to find out that their investment strategy is wrong as soon as possible and fix it i
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The student demonstrated the ability to understand a vast area of research and clearly identify some of the problems in this area Youthen went on to develop some solutions to these problems
The student also has an overall command of relevant background literature You've done a very good job combining all of what we've discussed into a strong paper As noted throughout, however, if you analyse more deeply some of technical data for current trend of stocks in reality ,your paper would be more than perfect
You are an enthusiastic learner who enjoys school and learns hard, you use my suggestions to deal with matters independently and in a positive way You conduct your duty with maturity and respond appropriately when corrected You have good time management
This shows to me that you cooperate well and consistently with the teacher and other students Moreover you have set an example of excellence in behavior and cooperation
Overall, it is clear that you understand what you intend to do and try to present interesting idea
Nguyen Thi Hong Mai iii