International Journal of Research in Computer and Communication Technology, Vol 2, Issue 3, March-2013

ISSN(Online) 2278-5841 ISSN (Print) 2320-5156

Financial Markets Prediction Using Quantitative Analysis (FMPQA)

Prof & HOD Dept. of CSE Christ Knowledge City , Cochin Abstract
Unlimited trade pressures forced the fiscal security organizations to explore the possibilities of information technology with the support of data mining technique. Now a days unbiased volume of trades in the markets where done with the back support of data mining technique. Data mining is a process of discovering various models, summaries, and derived values from a given collection of data .The technique helps the investors by forecasting the market trends and hence the profit traders got a predictive capability in their investments decisions. The technique has been applied to stock data to achieve better nancial solutions. Predictive patters from quantitative time series analysis will be invented and it helps to reduces the risk of investors. Key words- Data mining, fiscal security. 1. Introduction Many fund management companies have invested with heavily in data technology to assist them manage their financial portfolios. In past 3 decades, more and more massive amounts of historical information are keeping electronically and this volume is predicted to still grow significantly in the future. Nevertheless this wealth of knowledge, several fund managers are unable to totally make the most their worth. This can be as a result of data that's underlying the info for the aim of investment isn't straightforward to recognize. As an example, a fund manager might keep careful data regarding every stock and its historic information however still it's troublesome to pinpoint the delicate shopping for patterns till systematic preliminary studies are conducted When market beating ways are discovered via data processing [1], there is variety of potential issues in creating the leap from a back-tested strategy [2] to with success finance in future globe conditions. The primary downside is crucial the likelihood that the relationships don't seem to be random the least bit market conditions. This can be done exploitation massive historic market information to represent variable conditions, say ten years of knowledge, and confirming that the statistic patterns have statistically vital prognostic power for (1) high likelihood of profitable trades and (2) high profitable returns for the investment. 2. Predictive Approaches There are three predictive approaches[3] available. They are Fundamental, Financial and Technical. In this research work Technical Predictive Approach is used. Technical Predictive Approach includes Time Series Quantitative Analysis[4], Stochastic Analysis and Heuristics[5][6].Time series Quantitative Analysis is used in this research work to predict the Financial Market. About 200 time-series analytics have been well documented. However, the criterion that is used to combine these analytics to arrive at predictive strategies is not understood well. Therefore, a systematic study is needed to individually evaluate best-known time series analytics for their predictability for profitable stock trades. Also, when multiple noncorrelated time series analytics are combined, there is a potential to improve the predictive power. In this study, potential combination studies will be conducted and the combination patterns that maximize profitable trades as well as result in high return on investment will be explored. 3. Problem statement In this era, most of the fund managers have automated their fund management by the

Dr.Prem Krishnan

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application of predictive statistical applications called Quant Analytics. Many generalized academic studies have said that the financial market behaves in a random order. However, our empirical studies show that individual stocks or sectors can be predicted using quantitative analysis using historic data. 3.1 Quantitative Analytics

International Journal of Research in Computer and Communication Technology, Vol 2, Issue 3, March-2013

ISSN(Online) 2278-5841 ISSN (Print) 2320-5156

determined to a large extent on investor psychology. Seeing a stock rise in price may cause investors to jump on the bandwagon and this rush to buy drives the price even faster. A falling price can have the same effect. These are short-term fluctuations. Stock prices tend to normalize after such runs. 3.3 Stock Prices and Quotes In glancing through the stock prices listed in the newspaper one might wonder how stocks are priced and what affects price movement. After all, there are a wide variety of prices and some well-known companies are traded for relatively low prices while obscure listings may sell at high prices. To a certain extent stock prices are determined by investor confidence but that confidence in turn is based on real or perceived performance. Companies report their financial status on a quarterly basis when they disclose cash flow, sales and earnings. These hard numbers are the foundation of a company's worth, but investor speculation can undermine or override actual financial data. Rumors abound on the stock market, and if there is news that a company is about to make a strategic move buyers may flock to buy that stock. As with any other market, the principal of supply and demand applies. If there is a sudden upsurge in investor interest, the price of a stock will rise accordingly. Conversely, fear among investors can cause a stock price to plummet. In the long run, however, company performance and worth are the biggest factors in determining stock prices. 4.Types of Trading The stock market is a reliable indicator of the actual value of companies who issues stocks. Values of stocks are based on verifiable financial data such as sales figures, assets and growth. This reliability makes the stock market a good choice for long term investing well-run companies should continue to grow and provide dividends for their stockholders. The stock market also provides opportunities for short-term investors. Market skittishness can

Data are stored in bar data format. Bar has 6 fields they are open, low, high and close prices, volume, and starting time stamp. Open is the open price of the stock in the given time period. Low is the lowest price of the stock, high is the highest price of the stock and close is the closing price of the stock. Volume represents the total number of stocks traded during the period. A bar data represents an abstract sample of trades that have taken place during the given period. Bar data can be formulated using different time intervals in minutes, hours, days, weeks or months. We will formulate the bar data according to the needs of the study. We will use at least 10 years of the stock market data for the study. About 200 time series quantitative analytics have been well documented to conduct technical studies of stocks. However, a clear-cut strategy is lacking to generate buy and sell conditions on individual stocks. As these analytics are done upon the same data, there is a possibility of having high correlation between multiple analytics. There is a need to study combinations of uncorrelated analytics in order to improve the predictive power. In this study, a systematic approach of combinatorial quantitative analytical studies will be undertaken to find out the best combination patterns that have the predictive power of high probability of profitable trades and high percentage return. 3.2 Stock Markets The term 'Stock Market' is commonly used to encompass both the physical location for buying and selling stocks as well as the overall activity of the market within a certain country. When we hear an expression such as 'The stock market was down today' it refers to the combined activity of many stock exchanges. Fluctuations in stock prices are also driven by supply and demand, which in turn are

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cause prices to fluctuate quite rapidly and investor psychology can cause prices to fall or rise even if there is no financial basis for these variations. 4.1 Position Traders

International Journal of Research in Computer and Communication Technology, Vol 2, Issue 3, March-2013

ISSN(Online) 2278-5841 ISSN (Print) 2320-5156

position. Day traders need to be rational and analytical. Emotional buyers will quickly lose money in this type of trading. Because of the close attention needed to market conditions, day trading is a full-time profession. 5. Stock Options Stock options are contracts to buy (or sell) a stock at a certain price before a certain time in the future. Buyers of options have the right to buy the stock at the specified price, but they are not obligated to exercise their option. Sellers of options have the obligation to sell the underlying stock if the buyer of the option wishes to exercise it. A contract to buy is called a 'call option'. The buyer of a call option hopes the price of the underlying stock will rise, allowing him to buy it at less than market value. The seller of the call option expects that the price of the stock will not rise, or at least is willing to accept a partial loss of profits made from selling the call option. 6.Technical Analysis Technical analysis is the art and science of examining stock chart data and predicting future moves on the stock market. Investors who use this style of analysis are often unconcerned about the nature or value of the companies they trade stocks in. Their holdings are usually short-term once their projected profit is reached they drop the stock. The basis for technical analysis is the belief that stock prices move in predictable patterns. All the factors that influence price movement company performance, the general state of the economy, natural disasters are supposedly reflected in the stock market with great efficiency. This efficiency, coupled with historical trends produces movements that can be analyzed and applied to future stock market movements. Technical analysis is not intended for long-term investments because fundamental information concerning a company's potential for growth is not taken into account. Trades must be entered and exited at precise times; so technical analysts

Position trading is the longest term trading style of the three. Stocks could be held for a relatively long period of time compared with the other trading styles. Position traders expect to hold on to their stocks for anywhere from 5 days to 3 or 6 months. Position traders are watching for fundamental changes in value of a stock. This information can be gleaned from financial reports and industry analyses. Position trading does not require a great deal of time. An examination of daily reports is enough to plan trading strategies. This type of trading is ideal for those who invest in the stock market to supplement their income. The time needed to study the stock market can be as little as 30 minutes a day and can be done after regular work hours. 4.2 Swing Traders Swing traders hold stocks for shorter periods than position traders generally from one to five days. The swing trader is looking for changes in the market that are driven more by emotion than fundamental value. This type of trading requires more time than position trading but the payback is often greater. Swing traders usually spend about 2 hours a day researching stocks and executing orders. They need to be able to identify trends and pick out trading opportunities. They usually rely on daily and intraday charts to plot stock movements. 4.3 Day Traders Day trading is commonly thought of as the most risky way to play the stock market. This may be true if the trader is uneducated, but those who know what they are doing know how to limit their risk and maximize their profit potential. Day trading refers to buying and selling stock in very short periods of time less than a day but often as short as a few minutes. Day traders rely on information that can influence price moves and have to plot when to get in and out of a

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need to spend a great deal of time watching market movements.

International Journal of Research in Computer and Communication Technology, Vol 2, Issue 3, March-2013

ISSN(Online) 2278-5841 ISSN (Print) 2320-5156

Investors can take advantage of both upswings and downswings in price by going either long or short. Stop-loss orders limit losses in the event that the market does not move as expected. 5.1Charts Technical analysis relies heavily on charts for tracking market movements. Bar charts are the most commonly used. They consist of vertical bars representing a particular time period weekly, daily, hourly, or even by the minute. The top of each bar shows the highest price for the period, the bottom is the lowest price, and the small bar to the right is the opening price and the small bar to the left is the closing price 5.2Indicators and Patterns When glancing at charts the untrained eye may simply see random movements from one day to the next. Trained analysts, however, see patterns that are used to predict future movements of stock prices. There are hundreds of different indicators and patterns that can be applied. There is no one single reliable indicator, but when taken into consideration with others, investors can be quite successful in predicting price movements. 5.3 Patterns One of the most popular patterns is Cup and Handle. Prices start out relatively high then dip and come back up (the cup). They finally level out for a period (handle) before making a breakout a sudden rise in price. Investors who buy on the handle can make good profits. Another popular pattern is Head and Shoulders. This is formed by a peak (first shoulder) followed by a dip and then a higher peak (the head) followed again by a dip and a rise (the second shoulder). This is taken to be a bearish pattern with prices to fall substantially after the second shoulder. 6.Moving Average

The most popular indicator is the moving average. This shows the average price over a period of time. For 30 days moving average you add the closing prices for each of the 30 days and divide by 30. The most common averages are 20, 30, 50, 100, and 200 days. Longer time spans are less affected by daily price fluctuations. A moving average is plotted as a line on a graph of price changes. When prices fall below the moving average they have a tendency to keep on falling. Conversely, when prices rise above the moving average they tend to keep on rising. 7. Relative Strength Index (RSI) This indicator compares the number of days a stock finishes up with the number of days it finishes down. It is calculated for a certain time span usually between 9 and 15 days. The average number of down days divides the average number of up days. This number is added to one and the result is used to divide 100. This number is subtracted from 100. The RSI has a range between 0 and 100. A RSI of 70 or above can indicate a stock, which is overbought, and due for a fall in price. When the RSI falls below 30 the stock may be oversold and is a good time to buy. These numbers are not absolute they can vary depending on whether the market is bullish or bearish. RSI charted over longer periods tend to show less extremes of movement. Looking at historical charts over a period of a year or so can give a good indicator of how a stock price moves in relation to its RSI. 8. Money Flow Index (MFI) The RSI is calculated by stock prices, but the Money Flow Index (MFI) takes into account the number of shares traded as well as the price. The range is from 0 to 100 and just like the RSI, an MFI of 70 is an indicator to sell and an MFI of 30 is an indicator to buy. Also like the RSI, when charted over longer periods of time the MFI can be more accurate as an indicator. 9.Bollinger Bands This indicator is plotted as a grouping of 3 lines. The upper and lower lines are plotted according to market volatility. When the market is volatile the space between these lines widens and during

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times of less volatility the lines come closer together. The middle line is the simple moving average between the two outer lines (bands). As prices move closer to the lower band the stronger the indication is that the stock is oversold the price should soon rise. As prices rise to the higher band the stock becomes more overbought meaning prices should fall. Investors to confirm other indicators often use Bollinger bands. The wise technical analyst will always use a number of indicators before making a decision to trade a particular stock. 10.Trading Systems

International Journal of Research in Computer and Communication Technology, Vol 2, Issue 3, March-2013

ISSN(Online) 2278-5841 ISSN (Print) 2320-5156

Trading system are applications used in trading. Usually they are used according to market conditions. While general trading systems can be used under all market conditions, others can be used only within well defined market conditions such as up-trending, down-trending and wavering market (has no definite trend, but wavers up for a few days and down for another few days along a flat horizontal line) conditions. While developing trading systems, we have to keep in mind a number of factors. The following sections describe some of the very essential aspects the trading team should keep in mind while developing trading systems: 10.1 Using of Price and Volume Data. The building blocks of rules are the time-series bar data. Bar data represents a true sample of data at point in time for the given interval it represents. In bar data, there are two fundamental data sets, namely the price data and the volume data. Many of the analytical functions depend upon the price data and give scant importance to the volume data. However, we have to understand volume is as much important as the price data. Using the price and volume data we can determine the supply and demand side of the equation. Using the logic given below, try to understand the relationship between price and volume in determining the supply and demand side of the equations: Range of the price move R = H - L. Range of the supply side (sell) price move S = H - C. Range of the demand side (buy) price move D = C L.

Therefore, the supply side volume SV = S / R * V. Therefore, the demand side volume DV = D / R * V which is equal to V SV. The Supply and Demand indices can be computed as: Supply index SI = S / R * 100 which is equal to SV / V * 100. Demand index DI = D / R * 100 which is equal to DV / V * 100. If we want to represent the percents from -100 to +100 then we have to use the formulae: Supply index SI = (S / R - 1.0) * 100. Demand index DI = (D / R - 1.0) * 100. In the computation, it is essential to set value above 100 as 100 indicating saturation and below -100 as 100 indicating saturation to the full. 11. Conclusion This is the small step towards the prediction of stock prices and we have succeeded in some extend using the quantitative method. And these predicted information could be useful for the buyers and sellers of the stock and its still under refinement and hope that we can come across with more accuracy as the final one. 12.References
[1] Investor Home ,Data Mining, investorhome.com/mining.htm [2] Backtesting, confidentstrategies.com, /backtesting.htm [3] Forsythe, Robert / Nelson, Forest / Neuman, George R. and Wight, Jack (1992),Anatomy of an Experimental Political Stock Market http://www.biz.uiowa.edu/iem /archive/forecasting.pdf [4] Equity-Management-Quantitative -Analysis, www.amazon.com [5] Tutorial on Heuristic Optimization in agent based models. [6] A test of a charting heuristic, sciencedirect.com/

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