Predicting the movements of equity stocks using exponential moving average. The sample of banking stocks in NSE

Abstract

The aim of the study is to discover the validity of the Exponential Moving Average (EMA) for short term investments. Here we collected the closing prices data of HDFC Bank, ICICI Bank, Kotak Bank, State Bank of India and Punjab National Bank which was listed in National Stock Exchange (NSE) for the period of 1st April 2019 to 1st October 2019. Here we identified that the Exponential Moving Average (EMA) technical tool will able to generate the reliable and valid results which can make to choose right equity stock for short term investments. The study concludes that exponential Moving Average (EMA) will competent to generate the valid results but investor should not only depends Exponential Moving Average (EMA) and also verifies with other technical indicators

Key Words: Exponential Moving Average, Technical Analysis, Trading Strategy, Indian stock Market.

Introduction

Now a day, the investments in stock markets is more risky, due to uncertainty in movements of the prices. So, overcome the risk of uncertainty in movements and to predict the correct movements of prices. The investor relies on technical analysis which makes to take right decision while investing the funds. Now a day, we have multiple technical tools among those, exponential moving average is one of them.

Generally, the simple and easiest form of moving average is simple moving average (SMA), is calculated by arithmetic mean of given set of values. For example, to calculate 10 day simple moving average, we add up recent 10 days closing prices of any specific stock and make divide the total value with numbers of days (10 days). If the trader wishes to see the 20 day moving average, we add up recent 20 days closing prices of the stock and make divide the total value with number of day (20 days). Like that we can calculate the 50 day moving average, 100 day moving average and 200 day moving average.

Exponential Moving Average

The exponential moving average is a type of moving average that gives more weight to recent prices in an attempt to give the more responsive information. That helps investors to choose right investments and to make profitable returns. The following the equations of exponential moving average:

EMA=Price (t) × k + EMA(y) x (1−k)

Price (t) = current price

K (smoothing factor) = 2/ (n+1)

N = Number of time periods

EMA (y) = previous EMA

Initially while applying the formula to calculate the first point of the EMA, there is no value available to use as the previous EMA. To overcome this small problem can be solved by starting the calculation with a simple moving average and continuing on with the above formula from there.

After applying the exponential moving average, we can able to identify the trend of the stock. So it makes to indicate whether to go for buy or sell the stock.

Research Methodology

With reference to HDFC Bank, ICICI Bank, Kotak Bank, Punjab National Bank and State Bank of India stock prices collected from NSE India from period of 1st april 2019 to 1st October 2019. The above stocks are top performers in terms volume and as wells as market capitalization. So, here we choose the above stocks to analyse the reliability of the exponential moving average.

Trading Strategies

Strategy 1

When stock price crosses above the exponential moving average (EMA) and stays as long as above the EMA indicates the potential positive change in trend. Which means it’s time take the position the stock.

Graph 1 Shows the Comparative Analysis of Stock line and 10 Day EMA of Nocil Ltd

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Strategy 2

When stock price crosses below the exponential moving average (EMA) and stays as longs as below the EMA indicates the likely negative trend is started. So, it’s time to exit the position or its time to take the short position

Graph 2 Shows the Comparative Analysis of Stock line and 10 Day EMA of Tata Motors Ltd

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Strategy 3

Here we need to use two Exponential moving averages in a chart: One longer EMA and one shorter EMA. When the shorter EMA crosses above the longer EMA, it indicates the buy signal and making the uptrend. It is also known as golden cross.

Graph 3 Shows the Comparative Analysis of 20 Day EMA and 50 Day EMA of Amaraja Batteries ltd

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Strategy 4

When shorter EMA crosses below the longer EMA, it’s indicates the sell signal and makes downtrend. It is also known as dead signal.

Graph 4 Shows Comparative Analysis of 20 Day EMA and 50 Day EMA of Heritage Foods Ltd

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Empirical Results

Graph 5 Shows the Comparative Analysis of Stock line, 20 Day EMA and 50 Day EMA of HDFC Bank Ltd

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From the above chart, it is observed that initially stock line stays above the 20 Day EMA and 50 Day EMA and at a same time 20 Day EMA (shorter EMA) was above the 50 Day EMA (longer EMA) which indicates very positive trend and generates very good returns during the period. As long as stock line maintains higher, the stock was in positive trend. But during the period of month of July stock line breaks below the 20 Day EMA and as well as 50 Day EMA which indicates negative trend, thereafter stock went to down trend. At this moment it is not suggestible to take the position on this stock.

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