Friday, July 11, 2014

NIFTY: Technicals - Choose Your Divination!

Now with the budget out of the line, we will be trading relatively event-less in near term more or less. So focus is less macro and more micro, stock-picking and timing the markets etc. In case you rely on technical indicators, here is a quick summary of what works and what does not among the weapons in the technical traders' arsenal for NIFTY. All data from Bloomberg.

The first chart shows the total performance of different strategies based on technical indicators, against simple buy and hold. The whiskers show the maximum and minimum annual returns, while the thicker bar s show the average annual returns in a trending market and in a range-bound markets (it is white if trending return < range bound return and black otherwise). The data spans 2004 to YTD 2014. The trending years are identified as 2004 to 2007 and then 2010 and 2014.

The second chart shows the relative rankings of strategies in a given year (1 is the best, 23 the worst). Again the whiskers show the best and worst ranks over the years and the thick bars show the average annual ranks in trending as well as range bound markets (again, it is white if the average trending rank is lower than, i.e. better than, average range bound rank)

So based on this if you believe we are in a trending market, NOTHING beats the simple strategy of buy and holds. And if you think we are in a range bound market, the best performing strategy is a variation of moving average (Triangular moving average - a three-point double-smoothed variation of the moving average method, with majority of weights in the middle point).

In general, you are better off following Ichimoku or different variations of moving average methods in a trending markets (if buy and hold is too simple for your taste!). And in range bound market also, the moving averages perform relatively better than other complicated indicators. But even then, they do not beat the simple buy and hold strategy by a large margin.

Of course, as we all know, past performance is not indicative of future returns.

No comments:

Post a Comment