Data Analysis for Decision Making

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A useful tool in the hands of investors will be one that identifies share price movements. The tool should also help to make a good guess of the coming prices in the future. We know that technical analysis has developed rules based on simple statistical analysis of price data and price patterns. An investor can make decisions based on relevant data price analysis. A handy set of tools are provided below.

Arithmetic Moving Averages

Under this method of data analysis, a for a time period of ‘n days’ share prices is used as a sample. The moving averages are frequently plotted with prices to make buy and sell decisions. The Arithmetic Moving Average is nothing but the simple average of the last ‘n’ period prices.

Here ‘n’ = number of days starting from a given chosen point of time of a sample period. The number of days chosen as a sample can be linked with the investors holding period. For example, an investor with a long holding period may use a 250 day moving average curve. An investor with a short holding period may use a 25 day moving average curve.

The process is like this. Let us say that we are configuring an Arithmetic Average on the 2nd day from a given chosen point of time:

·         AMA = (Price on day 2 + price on day 1) / 2

Let us say that we are configuring an Arithmetic Average on the 3rd day from a given chosen point of time:

·         AMA = (price on day 3 + price on day 2 + price on day 1) / 3

With the AMA approach, the price curve and the moving average curve have to be used together to draw the most likely prices of the future based on the price trend. It depends on whether the price curve cuts the moving average curve from above or below.

·         If the price curve cuts the moving average curve from below, then it is a buy signal as prices are expected to go up.

·         If the price cuts the moving average curve from above, then is a signal to sell the stock.

·         An investor can use a ‘filter’ to allow for a certain percentage of price movements above or below the moving average price line. For example, an investor may allow a further 15% ‘filter’ once the price curve cuts the moving average curve either from above or below.

Rate of Change

This measures the acceleration and deceleration of share prices. These charts are used in conjunction with the price charts, when an investors needs to draw inferences. It is important to know that any change in the trend of the prices would immediately show on the chart because it could signify acceleration or a deceleration of prices. This can also be interpreted as a change in trend of the share prices for a specific period of time. These charts are available in abundance nowadays as many software programs provide the information.

Filter Rules

These represent mechanized trading rule provided by today’s computerized trading systems. For this rule to apply, a certain percentage is used, say ‘z’ percent. Whenever the price rises above ‘z’ percent from the most recent peak, an uptrend is indicated and vice versa.

It is not to say that these are golden rules that apply to every situation. A single rule may work at one time but may fail miserably in the next time span. In fact, there is no one that can predict with certainty about stock market prices. Market knowledge and sentiments always seem to play a major role in the demand and hence the price of the stocks. It would be wise for an investor to invest his time into using various methods of security analysis together before he decides to buy or sell a share.