Use of Technical Analysis in Bangladesh Capital Market

Abstract

Security Analysis means valuation of securities by forecasting future price movements. Analysis involves collecting information, processing them and providing an outcome. To analyze a security, we must have proper knowledge about its past sales, trade volumes, patterns, financial data, price and macroeconomic factors. The objective is always to determine the intrinsic value of a security so that investors can earn abnormal return and limit losses by trading securities. Technical Analysis, one of the two renowned methods of security analysis, refers to the analysis conducted by the technical analysts/chartists/traders to predict the future price of a security through its past prices, volume of transactions, patterns and trends. This kind of analysis includes analyzing the charts i.e. identifying trends, classifying different patterns, considering trade volumes and using various technical indicators in graphs for different shorter and longer time frames. However, the three very important and basic assumptions or principles of technical analysis are the market discounts everything, price moves in trends and history tends to repeat itself. According to EMH theory, a fully functional and efficient security market has to be either strong form efficient, semi-strong form efficient or weak form efficient. If a market is not at least weakform efficient, it is not efficient at all. In this case, technical analysis is beneficial for investors. If the market is efficient, intrinsic value of securities equals their market value. On the other hand, if the market is inefficient, it is considered either bullish or bearish. Bullish market refers to the situation where most of the securities in the market are overbought or overvalued. In contrast, Bearish market refers to the situation where most of the securities in the market are oversold or undervalued. Support and Resistance Level is one of the very basic and important concepts of technical analysis determined by market psychology as well as demand and supply. Support Level refers to the point below which it is difficult for the stock price to drop down. Resistance Level, on the other hand, is the point above which it is hard for stock price to climb up. Trend is a general direction formed by a series of high/peek and low/through of stock movements. Trends are primarily classified into upward trends, downward trends and horizontal/sideways trends. Based on their lengths, they can be further classified into long term, intermediate term and short term trends. Chart Patterns are different shapes or forms that are usually repetitive in nature and provides continual or reversal signals that help technical analysts understand future trends and movement in the direction of prices. Furthermore, a chart is the graphical representation of movements in 6 the stock prices over a single period of time where closing price of each trading day is usually plotted in the graph. In technical analysis, chartists, also known as technical analysts, use charts to identify patterns and movements of future stock prices. Indicators refer to the tools or techniques used by the chartists conducting technical analysis in the trading market to predict the movement and identify trends in share prices. Some of the famous indicators are Moving Average, Simple Moving Average, Exponential Moving Average, Moving Average Convergence Divergence, Relative Strength Index, Elliott Wave Theory, Bollinger Bands, Breadth of Market Theory, TRIN Statistic or ARMS Index, Put/Call Ratio and so on. If we observe, we can see that many important technical indicators have been used by analysts to identify security values and predict future prices in Bangladesh capital market. Some of the notable ones are Moving Average, Exponential Moving Average, Relative Strength Index, Bollinger Bands and Moving Average Convergence Divergence or MACD. By conducting technical analysis using all five indicators mentioned above on three renowned Bangladeshi companies like Square Pharmaceuticals Limited, Mutual Trust Bank Limited and IDLC Finance Limited), we have come to this realization that the movement in the stock prices of Mutual Trust Bank Limited has been stable throughout the better part of July, August and September but there is a chance they might have to face bearish signal in the upcoming future. Moreover, Square Pharmaceuticals Limited might have experienced short term upward trend in the movement of stock prices in the last couple of months but is currently in bearish position. Finally, IDLC Finance Limited has been in bearish position for quite a time now. This situation is getting more severe and extreme every day since January 2019. Their stock prices have decreased around 50% approximately within last 8 months. In conclusion, we can say that Bangladesh Capital Market i.e. Stock Exchange is highly volatile, full of uncertainty and mostly bearish. Thus, stock prices are depreciating rapidly and the market is considered highly inefficient. Therefore, Investors should do their home works and analyze the market as well as individual company stocks properly before throwing away all their life’s savings in the market.