F405 Financial Derivatives
Technical Indicator Analysis and
Strategy Implementation
TEAM 03
Final Assignment
F405 Financial Derivatives
Technical Indicator Analysis and
Strategy Implementation
Prepared For
Ms. Tasneema Afrin
Assistant Professor,
Institute of Business Administration (IBA),
University of Dhaka.
Prepared by
Team B03
Shreyasee Karmaker
Roll: 80
Fariha Tabassum Deena
Roll: 86
Samiha Rahman
Roll: 88
Shubhashish Chakroborty
Roll: 102
Date of Submission
June 07, 2023
Letter of Transmittal
June 07, 2023
Tasneema Afrin
Assistant Professor
University of Dhaka.
Subject: submission for paper on technical analysis on the stocks of MCD, MA, EBAY, RL and
DAL using the chosen indicators RSI, CCI, MACD, Bollinger Bands, and ROC.
Respected Ma’am,
With due respect, we, team 03, would like to present to you our financial term paper on “The
Implementation of technical indicators and strategy.” that had been assigned to us as a part of the
coursework. Our report is based on secondary data and analysis conducted using Ninja trader 07
as instructed.
Making this report was an equally challenging and enlightening experience for us and we would
like to thank you for giving us this opportunity. We will be eagerly waiting for your feedback.
Please note that this term paper was prepared under your supervision and under no circumstances
will the report be produced for any other BBA (IBA) course as such. No part of this term paper
will be shared or republished without your authorization.
Sincerely yours,
Shreyasee Karmaker-Roll 80
Fariha Tabassum Deena-Roll 86
Samiha Rahman- Roll 88
Shubhashish Chakraborty- Roll 102
IBA BBA 28th
Contents
Letter of Transmittal ....................................................................................................................... 1
1. Introduction ................................................................................................................................. 7
1.1 Background ........................................................................................................................... 7
1.2 Objectives ............................................................................................................................. 8
2. Literature Review........................................................................................................................ 8
2.1 Company Overview .............................................................................................................. 8
2.1.1 McDonald’s.................................................................................................................... 8
2.1.2 Mastercard...................................................................................................................... 8
2.1.3 eBay ............................................................................................................................... 9
2.1.4 Ralph Lauren Corporation ............................................................................................. 9
2.1.5 Delta Air Lines ............................................................................................................... 9
2.2 Indicator Overview ............................................................................................................. 10
2.2.1 RSI ............................................................................................................................... 10
2.2.2 CCI ............................................................................................................................... 10
2.2.3 Bollinger Bands ........................................................................................................... 10
2.2.4 ROC ............................................................................................................................. 10
2.2.5 MACD.......................................................................................................................... 11
3. Methodology ............................................................................................................................. 11
3.1 Indicator Implementation .................................................................................................... 11
3.1.1 RSI ............................................................................................................................... 11
3.1.2 CCI ............................................................................................................................... 11
3.1.3 Bollinger Bands ........................................................................................................... 12
3.1.4 ROC ............................................................................................................................. 12
3.1.5 MACD.......................................................................................................................... 12
3.2 Strategy Building ................................................................................................................ 12
4. Analysis..................................................................................................................................... 13
4.1 McDonalds .......................................................................................................................... 13
4.1.1 RSI on McDonalds ....................................................................................................... 13
4.1.2 CCI on McDonald's (MCD) ......................................................................................... 14
4.1.3 MACD on MCD .......................................................................................................... 15
4.1.4 Bollinger Bands on MCD ............................................................................................ 16
4.1.5 ROC on MCD .............................................................................................................. 17
4.2 Mastercard........................................................................................................................... 18
4.2.1 RSI on MasterCard ...................................................................................................... 18
4.2.2 CCI on Mastercard (MA) ............................................................................................. 19
4.2.3 MACD on Mastercard: ................................................................................................ 20
4.1.4 Bollinger Bands on MA ............................................................................................... 21
4.1.5 ROC on MA ................................................................................................................. 22
4.3 Delta Airlines ...................................................................................................................... 23
4.3.1 RSI on Delta ................................................................................................................. 23
4.3.2 CCI on Delta Airlines (DAL) ...................................................................................... 24
4.3.3 MACD on DAL ........................................................................................................... 25
4.3.4 Bollinger Bands on DAL ............................................................................................. 26
4.3.5 ROC on DAL ............................................................................................................... 27
4.4 EBAY.................................................................................................................................. 28
4.4.1 RSI on EBAY .............................................................................................................. 28
4.4.2 CCI on EBAY .............................................................................................................. 29
4.4.3 MACD on EBAY ......................................................................................................... 30
4.4.4 Bollinger Bands on EBAY........................................................................................... 31
4.4.5 ROC on EBAY ............................................................................................................ 32
4.5 Ralph Lauren ....................................................................................................................... 33
4.5.1 RSI on Ralph Lauren ................................................................................................... 33
4.5.2 CCI on Ralph Lauren (RL) .......................................................................................... 33
4.5.3 MACD on Ralph Lauren .............................................................................................. 34
4.4.4 Bollinger Bands on RL ................................................................................................ 35
4.4.5 ROC on RL .................................................................................................................. 36
5. Strategy fine turning and implementation................................................................................. 36
5.1 RSI-CCI strategy for MA stocks......................................................................................... 36
5.2 Strategy Conditions and Actions ........................................................................................ 38
5.2.1 Sell Condition and Action for bullish market .............................................................. 38
5.2.2 Sell Condition and Action for bearish market ............................................................. 39
5.2.3 Buy Condition and Action for Bullish market ............................................................. 40
5.2.4 Buy Condition and Action for bearish market ............................................................. 41
5.2.5 Stop loss and targets set ............................................................................................... 42
5.2.6 Summary Table for all Conditions and Action ............................................................ 43
5.3 Implementation of the RSI-CCI strategy on other stocks ................................................... 44
5.3.1 Result Summary ........................................................................................................... 44
5.3.2 MacDonalds results ...................................................................................................... 44
5.3.3 Delta Airlines Results .................................................................................................. 45
5.3.4 Ralph Lauren Results .................................................................................................. 46
5.3.5 EBAY results ............................................................................................................... 47
6. Observation & Findings ............................................................................................................ 48
6.1 Indicator Implementation .................................................................................................... 48
6.2 Strategy Implementation ..................................................................................................... 49
7. Recommendations ..................................................................................................................... 49
8. Conclusion ................................................................................................................................ 49
References ..................................................................................................................................... 51
Appendices .................................................................................................................................... 52
A.
Strategy finetuning for MA – total 25 % profitability ................................................... 52
B.
Strategy finetuning for MA – total 55% profitability .................................................... 53
C.
Strategy finetuning for MA – total 60% profitability .................................................... 55
D.
Strategy finetuning for MA – total 100% profitability .................................................. 56
1. Introduction
Technical analysis employs statistical trends to identify trading opportunities through price and
volume data. Technical analysis aids traders in determining support and resistance levels, entry
and exit locations for trades, and supply and demand analyses for securities; hence help the traders
to make decisions and understand market behaviour. So, trading in the short term is made more
profitable by technical analysis. Indicators are used in technical analysis to provide data and
visualizations. These indicators compute historical price and volume data to identify price trends
or reversals, momentum changes, trend confirmations, etc. Thus, with the help of indicators,
traders can identify patterns and trends in price data.
1.1 Background
The chosen indicators for the technical analysis of this report are MACD, CCI, RSI, ROC and
Bollinger bands. We have chosen 5 companies from 5 industries to apply these indicators:
Company
Industry
McDonalds
Fast Food
MasterCard
Transaction & Payment Processing
Services
EBAY
Web marketing Retail
Delta airlines
Passenger airline
Ralph Lauren
Luxury Fashion Retail
1.2 Objectives
· To apply different indicators on different companies of different industries to find out the buy
and signal points.
·
To measure the accuracy of the indicators in providing the right buy and sell signal for a
company / industry.
· To create a strategy for a company in Ninja Trader that will give minimum 75% profitability
on trades.
2. Literature Review
2.1 Company Overview
2.1.1 McDonald’s
McDonald's is a multinational fast food restaurant chain,operating in over 100 countries and
serving millions of customers every day. It is traded in the New York Exchange (NYSE) under the
ticker name MCD. The closing price of MCD as of 6th june, 2023 was 284.54.
MCD yielded 14.3% returns last year which was less than the industry average of 17.5% but higher
than the US market average of 1.3%. MCD stock is less volatile than 75% of the US stocks,
generally moving at a range of +/- 2% a week. The earnings per share is 9.42 and the dividend
payout ratio is 62%.
Through fundamental analysis, the intrinsic value of MCD stock was calculated to be $194.74,
which is much lower than the current market price of $284.54. Hence, we can conclude that MCD
stocks are overvalued by 32%, and linking the following technical analysis with this fundamental
analysis, we shall make the buy or sell decision.
-
2.1.2 Mastercard
Mastercard is one of the largest payment processing companies in the world. The company’s stocks
are traded at NYSE under the ticker MA. The latest closing stock price for Mastercard was $379.9.
MA yielded 4.4% returns the past year which exceed both the industry average (1.8%) and the US
market average (1.3%). MA stocks show less volatility than most US stocks, typically moving +/3% a week. The earnings per share is 10.19 and the dividend payout ratio is 21% 9.4
Through fundamental analysis, the intrinsic value of MA stock is 280.44 USD. Compared to the
current market price of $379.9 USD, Mastercard Inc is Overvalued by 26%
2.1.3 eBay
eBay is a multinational e-commerce company founded in 1995. Ebay is traded under the ticker
eBay on the NASDAQ stock exchange with the latest closing price of $45.18.
eBay yielded negative returns (-4.9%) the past year, underperforming both the market and the
industry. EBAY's weekly volatility (+/-4%) has been stable over the past year. In the last quarter,
the company registered earnings per share of 1.19 and a dividend payout ratio of 78%.
Fundamental analysis showed that ebay is trading below its 21.6% below its fair Value. The stock
currently trades at 45.18, but has an estimated fair value of $66.78. Hence, if technical analysis
also suggests a buy decision, then it is likely to be accurate.
2.1.4 Ralph Lauren Corporation
Ralph Lauren is one of the most known figures in global fashion. Traded on the New York Stock
Exchange (NYSE) under the ticker RL, the company is in the US Luxury Industry. As of June 06,
2023, the closing price of Ralph Lauren is $115.49 per share.
According to industry standards, Ralph Lauren provides higher returns. In 2022, RL stocks
generated 6.9% more returns than the average return of the US luxury industry. RL stocks also
exceeded the US market return by 1.3% in the past year.
In terms of volatility, Ralph Lauren stocks have been less volatile than 75% of US stocks in the
last 3 months. With earnings per share (EPS) of 7.99 and a dividend payout rate of 39%, RL seems
like a good stock to invest in. Currently, through fundamental analysis, it is calculated that RL is
trading at 17.3% lower than its fair value ($139.69).
2.1.5 Delta Air Lines
Delta Air Lines is one of the biggest airlines in the US. Delta Air Line stocks are traded on the
NYSE under the ticker DAL, as a part of the US Airlines industry. Currently, DAL stocks are
traded at $37.81 per share.
In the past year, DAL has exceeded the average returns of the US Airlines industry by 6.2%.
However, DAL underperformed compared to the US market which returned 1.3% to DAL’s -5.3%.
In comparison to the industry and its peers, DAL has a better Price-to-Earnings ratio of 12.8.
However, analysts state that DAL’s fair P/E should be 19.
As of June 6, 2023, Delta Air Lines stocks are considered to be 77.7% undervalued than their fair
price of $168.67.
2.2 Indicator Overview
2.2.1 RSI
The relative strength index, or RSI, is a tool used in technical analysis to gauge momentum. J.
Welles Wilder created it to keep track of the frequency and size of price changes in securities. The
RSI oscillates between -100 and +100 (Polly, 2009). Over a certain time, frame, the RSI is
computed by comparing the average price upward movement to the average price downward
movement. The resultant value is shown on a scale from 0 to 100 (Fernando, 2022). Technical
analysis indicators like the Relative Strength Index (RSI) are used to identify trend reversals, assess
the longevity of an existing trend, and generate buy/sell recommendations based on
overbought/oversold levels.
2.2.2 CCI
The CCI indicator, also known as the Commodity Channel Index, is often used by traders to assess
market activity and identify buying and selling opportunities. The CCI was developed by Donald
Lambert and first appeared in Commodities magazine in 1980 (Mitchell, 2021). The CCI is
calculated by measuring the difference of the current price with the historical average price during
a given time period (Mitchell, 2022). The current price refers to the current average price which is
the sum of the high, low, and closing prices divided by three (Mitchell, 2021). To make the final
value more understandable, it is normalized to a scale from -100 to +100 (StockCharts, 2022).
Extreme market conditions may be indicated by significant values over +100 or below -100.
2.2.3 Bollinger Bands
This technical indicator used a simple moving average (SMA) to indicate the movement of security
prices. Usually, a 20-day period is considered while creating the SMA. Therefore, a 20-day SMA
created the mean of the closing prices of the first 20 days as its first data point.
There is an upper limit and a lower band in Bollinger Bands. The upper band is typically 2 positive
standard deviations away from a 20-day SMA, whereas the lower band is typically 2 negative
standard deviations away from the SMA.
2.2.4 ROC
ROC is the Price Rate of Change (ROC), which is a momentum-based technical indicator. ROC
measures the percentage change in security prices between the current price and the price a certain
number of periods ago. Typically, the number of periods is set at 14.
ROC is plotted in a separate chart against a zero line that differentiates positive and negative
values. A positive value would indicate an upward pressure, which will in turn provide “buy”
signals. On the other hand, negative values would provide downward pressure, resulting in “sell”
signals. Any move toward the zero line indicates warning momentum.
2.2.5 MACD
MACD or moving average convergence divergence (MACD) is the most widely used indicator in
trading. MACD uses an exponential moving average to assign different weights to different
periods with most recent past prices getting the highest weights. MACD calculates the difference
between an instrument's 26-day and 12-day exponential moving averages (EMA) compared with
the 9-period trigger line or signal line.
A possible disadvantage of the MACD line is that it is a lagging indicator. Considering MACD
uses moving averages of past prices and moving averages lag behind prices, the signal it provides
can come late. By that point, the stock price might have reached the reversal point already before
the entry or exit signals are generated
3. Methodology
3.1 Indicator Implementation
3.1.1 RSI
An RSI value above 70 denotes overbought conditions and may portend a downward correction or
price reversal in the security. The probability of an upward correction or reversal is indicated when
the RSI value falls below 30, which is often regarded as oversold conditions (Blystone, 2021). We
have kept the 70 and 30 value fixed and applied the indicator to determine the buy and sell points
in this report too. When the RSI line crosses below 70, we have identified it as a sell point, when
the RSI line crosses over 30, we have chosen it as a buy point. If the indicator was able to correctly
signal most of the buy and sell point before time, we have considered it to be an excellent indicator.
If the signal was on time, we have considered it to be a moderately good indicator.
3.1.2 CCI
For CCI, when the CCI line crosses below 100, we have identified this as a primary sell signal and
when the CCI line crosses over -100, it has been identified as a primary buy signal. Apart from
that, we have identified some secondary points which will allow traders to trade by holding the
stock for a shorter time. When the CCI line crosses over 100, we can buy the share based on the
assumption that we will sell the share before the line crosses below 100 again. Similarly, we can
buy the share after the line crosses below -100 and sell it before the line crosses above -100. In the
analysis, the confirmation candles have been marked alongside the buy or sell signals from the
indicator, implying accuracy of the signal. The signal has been marked on-time when market trend
has already begun but there is still opportunity to participate in the market and late when there is
not.
3.1.3 Bollinger Bands
The Bollinger bands yielded the best results when compared with daily price fluctuations. The
results can be interpreted as when the upper band crosses the 20-day SMA line, then we conclude
the stock is overpriced resulting in a sell decision. On the other hand, when the
3.1.4 ROC
The ROC is plotted in a separate chart against a zero line that differentiates positive and negative
values. A positive value would indicate an upward pressure, which will in turn provide “buy”
signals. On the other hand, negative values would provide downward pressure, resulting in “sell”
signals. Any move toward the zero line indicates warning momentum.
3.1.5 MACD
When the MACD line (green) crosses over the signal line (purple), that implies the stock is
underpriced resulting in buy decisions. On the other hand, when the MACD line (green) is under
the signal line (purple), that implies the stocks are overvalued resulting in sell decisions. The (2612) EMA period was used for the MACD line and a combination of weekly/daily price fluctuation
values were used to yield the best possible results.
3.2 Strategy Building
In order to build the strategy, we first started by incorporating indicators separately to create
conditions. We first attempted utilizing only RSI to design a strategy, then we subsequently tried
building a strategy simply using CCI. In the strategy back testing, we saw that no strategy provided
more than 75% profitability, thus we attempted to combine both the RSI and CCI in one strategy
to provide buy and sell instructions. The justification for doing this was that since both indicators
were providing timely indications, by employing both together, we could eliminate the false
signals and ensure that both indicators were supporting the buy and sell recommendations. This
time, we got more than 75% profitability on Mastercard stock trading. When we used the identical
method on the remaining 4 equities, we consistently achieved over 60% profitability.
4. Analysis
4.1 McDonalds
4.1.1 RSI on McDonalds
RSI is a moderately good indicator for the fast food industry. After applying the indicator on
Macdonald’s, we can see that, when the RSI line crosses above 30, the candle stick of that day is
a confirmation stick that shows the price of the stock will increase from now on. Similarly, when
the RSI line crosses below 70, the candlestick confirms the upcoming price down trend. So, it
gives on-time signals to buy and sell the stock.
4.1.2 CCI on McDonald's (MCD)
The Commodity Channel Index (CCI) was first tested on the stocks of McDonalds (MCD) by
taking a 14-period index for the daily opening and closing prices of the MCD. The marked candlesticks show the confirmation of the trend identified by the indicator.
The indicator shows correct buy and sell signals for the specific stock for 87.5 percent of the time.
The indicator when analyzed also shows a mixture of on-time and late signals for both the buy and
sell signals in both bullish as well as bearish markets. One false signal was found for the indicator
along with the fact the indicator provides mostly on-time and not early signals as such, the CCI
indicator may be categorized as an average indicator as most signals obtained had already started
the trend however, still early enough to make small profit.
4.1.3 MACD on MCD
MACD was applied on the Mcdonald’s stock by taking the default 26-12 EMA period for daily
price changes. The MACD line gave zero false signals however, 50% of the signals were late.
Among the rest, the indicator gave an accurate timing signal twice and an early buy signal once.
These results are consistent with the lag prices concept of MACD which suggests that since MACD
makes uses of past prices, it makes the indicator a lagging indicator because it is prone to giving
late signals
4.1.4 Bollinger Bands on MCD
McDonald's is a large, well-established company with a relatively stable stock price. This means
that the stock is less likely to experience the extreme volatility that Bollinger Bands are designed
to identify.
We can see that there are several false sell signals for MCD stocks. Even when stocks are in an
uptrend, they are overlapping the upper band, giving a false signal of selling the stocks. Therefore,
Bollinger Bands is a highly inaccurate indicator to forecast MCD prices.
4.1.5 ROC on MCD
McDonald's is a mature company with a relatively stable stock price. This means that ROC is not
as sensitive to changes in price as it would be for a more volatile stock.
As we can see here, ROC provides frequent false signals for MCD stocks. Moreover, there are
significant late sell signals based on the ROC results. Therefore, ROC is not a fruitful indicator for
McDonald’s stocks at all.
4.2 Mastercard
4.2.1 RSI on MasterCard
RSI is a moderately good indicator for the Transaction & Payment Processing Services industry
too, as RSI when applied on Mastercard provided on time signal for buy and sell, without providing
any false signal in the chosen time frame of 22 August, 2022 to 15 March, 2023. The candlesticks
of their respective days were confirmation signals for the upcoming uptrend (when RSI crossed
above 30) and the upcoming downtrend (when RSI crossed below 70).
4.2.2 CCI on Mastercard (MA)
The Commodity Channel Index (CCI) taken for 28 periods was tested for the stocks of Mastercard
or MA where all the buy and sell signals observed were accurate. The marked candle-sticks show
the confirmation of the trend identified by the indicator.
The indicator showed a 100 percent accuracy with its signals being either on-time (8) or early (3).
As such, the CCI technical indicator is deemed to be a good indicator and is recommended for the
MA stocks.
4.2.3 MACD on Mastercard:
For the Mastercard stock, the default MACD period and weekly price fluctuations yielded the best
results. MACD provided mostly accurate time signals (5 out of 7) and two late buy signals. The
indicator failed to provide any early signals hence it is not a very good indicator to reap profits
during market corrections
4.1.4 Bollinger Bands on MA
Mastercard is a large, well-established company with a relatively stable stock price. This means
that the Bollinger Bands may not be as effective at identifying overbought and oversold conditions
as they would be for a smaller, more volatile company. Moreover, Mastercard's stock price is
often influenced by factors outside of the company's control, such as changes in interest rates or
economic conditions. This can make it difficult to use Bollinger Bands to accurately predict price
movements.
Similar to McDonald’s stocks, Bollinger Bands provides several false sell signals. However, the
overall trend of the prices is moderately captured using Bollinger. Hence, it can be considered a
moderately accurate indicator.
4.1.5 ROC on MA
Mastercard stocks because it is a defensive stock. Defensive stocks are typically less volatile than
cyclical stocks, and they tend to perform well during periods of economic uncertainty. As a result,
the ROC indicator may not be as effective at identifying overbought and oversold conditions in
these stocks.
Although ROC tends to follow the price changes of Mastercard on a wide spectrum, it shows
frequent false signals. Moreover, the buy signals for MA stock are late in some cases, which can
be damaging for investors.
4.3 Delta Airlines
4.3.1 RSI on Delta
Delta is a passenger airlines company. The RSI line provided on-time signal to buy or sell the
Delta stock, so it is also a moderately good indicator. Here we can see that, when we got the buy
signal from RSI after the line crossed over 30, the price next day jumped up, showing a bullish
trend in the market, as for the sell signal, the next day, price fell showing a bearish market trend.
4.3.2 CCI on Delta Airlines (DAL)
The 28 period CCI technical indicator was assessed against the daily traded stocks of Delta Airlines
(DAL). The marked candle-sticks show the confirmation of the trend identified by the indicator.
It was observed that the buy and sell signals provided were either on-time or late as they broke
through the resistance of market corrections. Fibonacci retracements were also utilized here to
identify market trends as opposed to market corrections.
The indicator also provided one major false signal as the market showed upward trend where as
the indicator not only followed in a downward trendline but also gave two false sell signals against
one minor market correction. As such, CCI’s accuracy with identifying market trends for the stocks
of Delta is not very recommendable. Therefore, the 28 period CCI is not a good technical indicator
for the daily traded stocks of DAL.
4.3.3 MACD on DAL
For Delta airlines, the default MACD time period and weekly price fluctuations were considered.
MACD mostly provided late signals for Delta airlines stocks i.e.,4 out of 7 times. The rest were
accurate timing signals and 1 slightly early buy signal. Hence, this is not a good indicator for delta
as MACD cannot anticipate the market movement beforehand.
4.3.4 Bollinger Bands on DAL
There are a few reasons why Bollinger Bands may not be a good technical indicator for Delta Air
Lines stocks. The airline industry is highly cyclical, meaning that stock prices tend to fluctuate
more than in other industries. This volatility can make it difficult to use Bollinger Bands to identify
trends or make trading decisions.
In addition to false sell signals on the Bollinger upper band, there can be false signals that fail to
capture the up and downtrend of the movement of DAL stocks. Hence, Bollinger is a highly
inaccurate indicator for DAL.
4.3.5 ROC on DAL
Delta Air Lines’ stock price is highly volatile. This volatility can make it difficult to identify
reliable trends using the ROC indicator. Additionally, the ROC indicator is not always reliable in
predicting future price movements. As a result, investors should use the ROC indicator with
caution when trading Delta Air Lines stocks.
Here, we can see that a big portion of the price change in DAL’s stock was misrepresented by
ROC. Moreover, there are signs of late signals here. Although there is an on-time signal as well,
ROC.
4.4 EBAY
4.4.1 RSI on EBAY
RSI is a moderately good indicator for the web marketing retail industry, because the buy and sell
signal are on-time predicting the bullish and bearish trend perfectly. This indicator also didn’t have
a false signal on e-bay.
4.4.2 CCI on EBAY
The CCI technical indicator was checked taking a 28 period for the stocks of EBAY. The marked
candle-sticks show the confirmation of the trend identified by the indicator.
In the analysis, the indicator gave all accurate buy and sell signals in the bullish as well as in the
bearish market. The market trends, be it upward or downward trend, was identified through
utilizing the Fibonacci retracements, as the market broke the support and resistance of market
corrections into an upward or downward trend it was seen to break the percentile retracements of
the Fibonacci series too as it moved along the trendline. As such, the CCI indicator provided mostly
early (4) and on-time (3) buy and sell signals with one slightly late yet accurate signal. As such,
CCI can also be deemed as a good indicator for the stocks of EBAY in daily trades as it gave no
false signal as well as provided mostly on-time and early signals of trend.
4.4.3 MACD on EBAY
MACD is a poor indicator for ebay stocks considering it gives late signals 80% of the time. The
first “late sell” signal was so late that the prices had almost reached a reversal point before the exit
signal generation. The rest was an early buy signal and no accurate timing signal. However, we
cannot characterize it as a bad indicator considering it never gave a false signal. Hence, we can
conclude that MACD is slightly late or slow compared to the ebay price fluctuations.
4.4.4 Bollinger Bands on EBAY
Bollinger bands can be a useful tool for identifying potential trading opportunities in eBay stock.
For example, if the price of eBay stock is trading close to the upper band, it may be a sign that the
stock is overbought and due for a pullback. Conversely, if the price of eBay stock is trading close
to the lower band, it may be a sign that the stock is oversold and due for a rebound.
Bollinger highly accurately captures the upward and downward trend of the movement of eBay
stocks. There are several early buys and sell signals here that can help investors gain the most
returns based on the past 14 periods.
4.4.5 ROC on EBAY
eBay is an e-commerce company. E-commerce companies are cyclical businesses, which means
their performance is tied to the overall state of the economy. As a result, eBay stock tends to
perform poorly during periods of economic uncertainty. This means that the ROC indicator may
not be as effective at identifying sell signals in this stock.
According to the screenshot, we can see a high discrepancy between the price of eBay and the
movement of ROC. Moreover, there are highly evident false and late signals. However, ROC does
capture the uptrend and downtrend of the stocks on time on some occasions. Therefore, ROC
provides highly inaccurate results for eBay stocks.
4.5 Ralph Lauren
4.5.1 RSI on Ralph Lauren
RSI is also a moderately good indicator for the company, Ralph Lauren. The buy and signal are
provided on time predicting the price uptrend and downtrend correctly. Out of all the 5 signals, 4
of them were correct and only 1 sell signal was false as it wasn’t able to predict the up-trend. So,
the indicator is roughly 80% accurate.
4.5.2 CCI on Ralph Lauren (RL)
The 14 period Commodity Channel Index (CCI) was checked against the daily traded stocks of
Ralph Lauren (RL). The marked candle-sticks show the confirmation of the trend identified by the
indicator.
It was observed that whenever the market broke into any upward or downward trend breaking one
or more of the Fibonacci retracements, the signal that CCI provided were late signals 63.3 percent
of the time which makes traders unable to participate in the trade with profitability since the stocks
are being traded daily. As such, 28 period CCI has been assessed to be a bad indicator for the
daily traded stocks of Ralph Lauren (RL).
4.5.3 MACD on Ralph Lauren
The MACD indicator was implemented on the weekly price fluctuations of Ralph Lauren stock.
Consistently, even with Ralph Lauren stocks, MACD gave mostly late signals (50%). The rest
were accurate timing signals and 1 early signal. Hence, MACD has to be combined with other
indicators to base the decision.
4.4.4 Bollinger Bands on RL
Ralph Lauren is a well-established company with a long history of profitability. This makes it a
good investment for traders who are looking for a stock with a low risk of default. However, it
also means that the stock is not as likely to experience the sharp price movements that Bollinger
bands are designed to identify. Bollinger picks up the upward and downward trend of RL with
moderate accuracy. However, there are several false sell signals and late buy signals that discard
the accuracy of Bollinger Bands on Ralph Lauren stocks.
4.4.5 ROC on RL
Ralph Lauren has a history of consistent earnings growth. Moreover, the company has a history of
consistent earnings growth. These are the characteristics that make RL suitable for the ROC
technical indicator.
We can see that in addition to on-time signals in most price changes, ROC provides early buy and
sell signals here. This can be pivotal information for potential investors. Moreover, ROC captured
the upward movement and downward movement of the prices pretty consistently. Therefore, ROC
can be considered a highly accurate indicator for RL.
5. Strategy fine turning and implementation
5.1 RSI-CCI strategy for MA stocks
For strategy building both RSI and CCI indicators were integrated on the Mastercard (MA) stocks
being shared daily as these two technical indicators presented good buy and sell signals for MA.
The strategy was tested on MA daily stocks till 1-1-2019 to formulate the strategy for the pre
pandemic period. A total of 17 back-tests were conducted on the strategy by changing different
conditions and actions.
The following is the final results obtained on the strategy through fine tuningStock
Mastercard (MA)
Profitable long trades
86.65%
Profitable short trades
64.29%
Profitable total trades (net)
75.86%
Performance
Good
Figure: RSI-CCI (MA, Daily)
Figure: RSI-CCI strategy chart for (MA, daily).
A total of 29 trades were conducted, of which 15 are long trades and 14 are short trades, using the
strategy which gave a net profitability of 75.86 per cent profitability, implying good performance
of the formulated strategy.
5.2 Strategy Conditions and Actions
For the strategy itself, Relative Strength Index or RSI of 28 period (in accordance with the findings
from indicator analysis) and a smooth of 3 alongside a 28 period Commodity Channel Index (CCI)
was taken.
5.2.1 Sell Condition and Action for bullish market
Two sell actions were set for the strategy, one for the bullish market and one for the bearish market.
Whether or not the market was bullish was identified using the 28 period RSI which stayed above
the average 50 line to imply the market is bullish.
Secondly, the CCI technical indicator was utilized to determine the market entry point for the sell
signal obtained. As such the 28 period CCI when drops below the +100 line, a sell signal was
detected, as per the conditions set taking the lookback period equal to 1.
Figure: Sell condition and action for bullish market; RSI (28)-CCI (28)
5.2.2 Sell Condition and Action for bearish market
The bearish market was identified using the 28 period RSI which stayed below the average 50 line
implying the current market is in a bearish state.
Secondly, the CCI technical indicator was utilized to determine the market entry point for the sell
signal obtained. As such the 28 period CCI when drops below the -100 line, a sell signal was
detected, as such the conditions were set taking the lookback period equal to 1.
Figure: Sell condition and action for bearish market; RSI (28)-CCI (28)
5.2.3 Buy Condition and Action for Bullish market
For the conditions, the bullish market was identified using the 28 period RSI which stayed above
the average 50 line implying the current market is in a bearish state.
Secondly, the CCI technical indicator was utilized to determine the market entry point for the buy
signal obtained. As such the 28 period CCI when crosses above the 100 line, a buy signal was
detected, as such the conditions were set taking the lookback period equal to 1.
Figure: Buy condition and action for bullish market; RSI (28)-CCI (28)
5.2.4 Buy Condition and Action for bearish market
For the conditions, the bullish market was identified using the 28 period RSI which stayed above
the average 50 line implying the current market is in a bearish state.
Secondly, the CCI technical indicator was utilized to determine the market entry point for the buy
signal obtained. As such the 28 period CCI when crosses above the 100 line, a buy signal was
detected, as such the conditions were set taking the lookback period equal to 1.
Figure: Buy condition and action for bullish market; RSI (28)-CCI (28)
5.2.5 Stop loss and targets set
The profit target was set to 5 percent of the buy and sell action and a stop loss at 2 per cent of the
trade was set to minimize the loss from the trade.
Figure: Stop loss and targets for RSI-CCI strategy
5.2.6 Summary Table for all Conditions and Action
CONDITION
ACTION
RSI
Parameter
Market Condition (RSI)
CCI Parameter
Signal
generated
RSI> 50
Bullish Market
CCI Cross above +100
Buy
CCI Cross below +100
Sell
CCI Cross above -100
Buy
CCI Cross below -100
Sell
RSI< 50
Bearish Market
5.3 Implementation of the RSI-CCI strategy on other stocks
5.3.1 Result Summary
Stocks->
MCD
MA
EBAY
DAL
Profitable long trades (%)
81.82%
86.65% 50.0%
62.64% 55.56%
Profitable short trades (%)
50.0%
64.29% 71.43%
81.82% 67.67%
Net Profitable total trades (%)
65.22%
75.86% 61.54%
72.73% 61.11%
Profitable long trades
11
15
6
11
9
Profitable short trades
12
14
7
11
9
Profitable total trades (net)
23
29
13
22
18
Conclusion/ Recommendation
Averag
e
Very
Good
Averag
e
Good
Averag
e
5.3.2 MacDonalds results
Figure: Back-test results for RSI (MCD (Daily) 28, 3)- CCI (MCD (Daily, 28)
RL
Figure: Chart for RSI (MCD (Daily) 28, 3)- CCI (MCD (Daily, 28)
5.3.3 Delta Airlines Results
Figure: Back-test results for RSI (DAL (Daily) 28, 3)- CCI (DAL (Daily, 28))
Figure: Chart for RSI (DAL (Daily) 28, 3)- CCI (DAL (Daily, 28))
5.3.4 Ralph Lauren Results
Figure: Back-test results for RSI (RL (Daily) 28, 3)- CCI (RL (Daily, 28))
Figure: Chart for RSI (RL (Daily) 28, 3)- CCI (RL (Daily, 28))
5.3.5 EBAY results
Figure: Back-test results for RSI (EBAY (Daily) 28, 3)- CCI (EBAY (Daily, 28))
Figure: Charts for RSI (EBAY (Daily) 28, 3)- CCI (EBAY (Daily, 28))
6. Observation & Findings
6.1 Indicator Implementation
MCD
MA
DAL
RL
EBAY
RSI
on-time
on-time
on-time
on-time
on-time
CCI
on-time/late
early/on-time
on-time/late
Late
on-time
MACD
Late
on-time/late
Late
Late
Late
Bollinger
Bands
False
False
False
Late
Early
ROC
False/Late
False/Late
Late
Early/On-time False/Late
6.2 Strategy Implementation
The strategy when implemented for the chosen stocks of MCD, MA, DAL, EBAY and RL all
showed above 60 percent net profitability on trades. The profitability on long trades (buy) was
lower than profitability of short trades (sell) on average, indicating profits were more dependent
on the accuracy of short trades. The strategy is best implementable on the stocks of Mastercard
(MA) and the rest of the stocks should be proceeded with caution. The charts formulated through
the strategy implementation verified that the conditions and subsequent actions set for the strategy
were being implemented accurately as well as profitably. The number of trades made ranged from
18-29, which is moderate for the stocks being discussed are mostly value stocks.
Although on a standalone basis RSI and CCI are not better than average indicators with on-time
and ontime/ early results the combination of these are better implemented for gaining more profit.
7. Recommendations
The following recommendations may be made from the above analysis on technical indicators● Very few indicators were found to show early indication of buy or sell through the analysis,
as such, indicators may be tried for different periods or other indicators can be assessed for
better results.
● Many indicators were observed to give on-time signals, although this implies that the
market has already started on the trend, however, there is still opportunity to trade in the
market profitability, Early indication would have heightened the profit margin.
The following recommendations may be made from the above analysis on the strategy
implementation● The strategy formulated using the 28 period RSI average and the 28 period CCI average
were shown to provide beyond average results for all five stocks. Although the two stocks
performed only average on a standalone indicator the combination of both is a better
analyzer for the stocks, specifically for MA stocks.
● Different period averages for indicators may be tried for earlier and better signals for which
the strategy implemented might provide overall better trade profitability.
● It is also crucial to do a volume spread analysis, to understand market sentiment of the
stock and their financial statements for rather longer termed investments, this analysis is
implementable in short termed trading only.
8. Conclusion
The above analysis was conducted based on the available data on the given stocks of MCD, MA,
RL, EBAY and DAL with indicators available in different period averages. Although the analysis
does not portray a very good predictability on the stocks in most terms, it is conclusive that the
chosen indicators RSI, CCI, MACD, Bollinger Bands, and ROC might not be a good fit for these
particular sets of stocks. This information will allow traders to understand the variability and the
volume traded on stocks through these indicators so that they may utilize the indicators on better
stocks or different indicators for the same stocks. The strategy built is overall anticipated to boost
the profitability for the traders of these stocks as they will be able to navigate through market
corrections and market resistances and support and thereby identify false and accurate trends and
trade accordingly.
References
Blystone, D. (2021, April 30). Overbought or Oversold? Use the Relative Strength Index to Find
Out. Investopedia. https://www.investopedia.com/articles/active-trading/042114/overbought-oroversold-use-relative-strength-index-find-out.asp
Fernando,
J.
(2022,
July
15).
Relative
Strength
Index
–
RSI.
Investopedia.
https://www.investopedia.com/terms/r/rsi.asp
Mitchell, C. (2021). How Traders Use CCI (Commodity Channel Index) to Trade Stock Trends.
Investopedia.
https://www.investopedia.com/articles/active-trading/031914/how-traders-can-
utilize-cci-commodity-channel-index-trade-stock-trends.asp
Mitchell, C. (2022). Commodity Channel Index - CCI Definition and Uses. Investopedia.
https://www.investopedia.com/terms/c/commoditychannelindex.asp
Polly,
A.
(2009).
Relative
Strength
Index
(RSI)
[ChartSchool].
Stockcharts.com.
https://school.stockcharts.com/doku.php?id=technical_indicators:relative_strength_index_rsi
StockCharts. (2023). Commodity Channel Index (CCI) [ChartSchool]. School.stockcharts.com.
https://school.stockcharts.com/doku.php?id=technical_indicators:commodity_channel_index_cci
Appendices
A. Strategy finetuning for MA – total 25 % profitability
Figure: Initial Conditions
Initially the four sets of conditions were merged into two, one for buy signal and one for sell signal
where only partial conditions were seen to be implemented giving 25 per cent net profitability on
total trades.
B. Strategy finetuning for MA – total 55% profitability
In the next trials the CCI and RSI were tried on a standalone basis, the results for the CCI alone
provided a staggering increase to 55% total net profitability.
C. Strategy finetuning for MA – total 60% profitability
When the action parameters were changed to default buy from its previous ranges made for
different price targets, the results showed an increase to 60% total net profitability.
False signals were later identified through the chart
D. Strategy finetuning for MA – total 100% profitability
A crucial parameter to the strategy building was understanding how the codes were being
implemented and the subsequent mistakes that were being made resulting from its implementation.
The codes were changed to 4 sets of separate conditions and actions which accounts for the final
strategy built.