EFET RANDOM GROUP NAME

Practical 1

Group Members
Siviwe Dube 2020625741
Britney Van Eden 2019295654
Yandani August 2018650636
Lesedi Mackay 2018482691

Siviwe Dube
siviwedube00@gmail.com
What is Trend Trading (Moving Momentum)

Trend trading is an investment strategy that assists in generating profits by analyzing

an asset movement and thus identifying the overall direction/ trend (Mitchell, 2022).
Thereafter, an investor can enter a position to either long or short the stock, depending
on whether there’s an upward or down trend. Additionally, trend trading uses a
combination of the moving average, either the Relative Strength Index (RSI) or
stochastic oscillator and the MACD Histogram.

Moving Average (MA)

Moving averages is a type of technical analysis that uses the mean of a consecutive
number of days to determine a trend (Srivastav, 2023). Typically, we use a short-term
moving average and a long-term moving average to identify a buy and sell single.
Thus, when the short-term MA trades above the long-term MA we buy the stock.
Conversely, when the short-term MA trades below the long-term MA we sell the stock.

Relative Strength Index (RSI) and Stochastic Oscillator

The RSI is a determines the overvalued and undervalued condition of a stocks price
by measuring of the speed and size of stock recent price change (Fernando, 2022).
While the Stochastic compares the ranges of the stock price over certain period to a
specific closing price (Hayes, 2023). Both the Relative Strength Index and the
Stochastic Oscillator are used to monitor and forecast market trends (Singh, 2021).
However, we use the RSI for trending markets and the Stochastic for sideway markets.
Both the RSI and Stochastic values are between 0 to 100. Generally, a low RSI and
stochastics is a buy signal while a high RSI and stochastics is a sell signal.

Moving Average Convergence/Divergence (MACD) Histogram

A MACD is indicator that calculates the MACD line through the subtraction of two
exponential moving averages (EMAs) (Dolan, 2023). Specifically, we use the 12 day
and 26-day EMA to calculate the MACD line. Thereafter, we can derive the signal line
from the 9-day EMA of the MACD line. MACD histogram uses a combination of the
signal line, histogram, and baseline to determine a trend reversal. As a result, when
MACD line cuts above the signal line, it is considered a buy signal. Conversely, when
the MACD fall below the signal line, it is considered a sell signal.
Why we chose Trend Trading as our investment strategy?

The reason we chose Trend Trading is because it maximises the leverage we get from
trading with future and thus maximise return. With the short tome horizon, my group
decide on trading a major of futures. However, this focus on futures will expose us to
a significant amount of risk. As a result, plan to use Trend Trading to mitigate the high
risk. The combination of the MA, MACD histogram and RSI/ stochastic the will
provides us with 3 buy and sell signals. Thus, we’ll be able to trade with the trend, by
buying futures of stocks that are in an upward trend. Moreover, will be able to trade
against the trend, by shorting futures of stocks that are in a downward trend. What’s
more, will be able to change our position on a stock if when we identify that a will trend
change.

Why will focus on the futures asset class?

In the JSE challenge speculator game, we have a choice of three asset classes being
shares, warrants and futures. Firstly, we have ruled out trading warrants as there is a
limit number of companies who offer them. Unfortunately, shares also seems like a
bad choice as the single stock futures are gear at 30% in the speculator game. As a
result, a trade in futures would be worth 3 times more than what it would be in shares.
which is why we decide to focus on futures.

What is the difference between Passive and Active Investing?

Typically, in Passive investing is where an investor keeps trading (buying and selling
of stocks) to a minimal and holds stock for longer (Thompson, 2023). Additionally,
buying into an index such as JSE Top 40 forms a big part of passive investing. While
active investing where investors continuously buy and sell share (Napoletano &
Schmidt, 2023). As a group we’ve decide on focus active investing to utilize the
changes in price we discovery through trend trading and therefore maximise short-
term profit. Additionally, we have a short investment horizon, thus passive investing
would be ineffective. Furthermore, as a group we’ll be able to divide our attention, so
each individual can focus on actively trading a particular range of stocks.
What is the difference between Bottom up and Top-down analysis?

Top-down analysis approach firstly looks at the market as whole, then an industry and
followed by a company before investment decision is made (Kuepper, 2022). The
approach looks at the whole picture before identifying particular industries and
companies to look at. On the other hand, Bottom-up analysis approach focus on
evaluating the value of specific stock rather than the whole market (Hayes, 2022).

As a group we personally used the top-down approach as we first look at South Africa
macroeconomic environment. From there we found that the technology and energy
industries was the best preforming. Thus, we plan on longing companies from these
industries. Additionally, we found that telecommunication industry had the worst
performance. Therefore, we plan on shorting a lot of telecommunication companies
such as Telkom and MTN.

What benchmark we will evaluate our investment portfolio against?

Primarily, our group will use the JSE Top 40 index and the All Share Index (ALSI). We
chose these indexes because they’ll allows us to assess the whole South Africa
market. Which will allow us to determine how effective our group is when compared to
the whole. Additionally, we also plan use this years top ten groups as well as last years
winners to gauge our effectiveness.
EFET RANDOM GROUP NAME Pr actical 1 gr oup me mbe rs a re Siviwe D ube , Britn ey Van Ed en, Y anda ni Aug ust a nd L esedi Mack ey

References List:

 Dolan, B. (2023) MACD indicator explained, with formula, examples, and

limitations, Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/m/macd.asp (Accessed: March 28, 2023).
 Fernando, J. (2022) Relative strength index (RSI) indicator explained with
formula, Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/r/rsi.asp (Accessed: March 28, 2023).
 Hayes, A. (2022) Bottom-up investing: Definition, example, vs. top-down,
Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/b/bottomupinvesting.asp (Accessed:
March 28, 2023).
 Hayes, A. (2023) Stochastic oscillator: What it is, how it works, how to calculate,
Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/s/stochasticoscillator.asp (Accessed:
March 28, 2023).
 Kuepper, J. (2022) What is top-down investing?, The Balance. The Balance.
Available at: https://www.thebalancemoney.com/what-is-top-down-investing-
1978894 (Accessed: March 28, 2023).
 Mitchell, C. (2022) Trend trading: Definition and how strategy aims for profit,
Investopedia. Investopedia. Available at:
https://www.investopedia.com/terms/t/trendtrading.asp (Accessed: March 28,
2023).
 Napoletano, E. and Schmidt, J. (2023) Active vs passive investing: What's the
difference?, Forbes. Forbes Magazine. Available at:
https://www.forbes.com/advisor/investing/passive-investing-vs-active-
investing/ (Accessed: March 30, 2023).
 Singh, N. (2021) Stochastic oscillator vs. RSI: Which indicator is better?,
TradeVeda. Available at: https://tradeveda.com/stochastic-oscillator-vs-rsi-
which-indicator-is-better/ (Accessed: March 28, 2023).
 Srivastav, A.K. (2023) Moving average, WallStreetMojo. Available at:
https://www.wallstreetmojo.com/moving-average-formula/ (Accessed: March
28, 2023).
 Thompson, C. (2023) What is passive investing, and how does it work?,
SmartAsset. SmartAsset. Available at:
https://smartasset.com/investing/passive-
investing#:~:text=Passive%20investing%20is%20an%20investing,try%20to%
20beat%20the%20market. (Accessed: March 28, 2023).