Wealth Management and Alternative

Investments

Assignment -2

Submitted to: Prof. Tarun K. Soni

Submitted by: Shreya Arya
FM-04
044046
1. DOW
The Dow Jones Industrial Average (DJIA), a stock market index that gauges the
performance of 30 significant American publicly traded firms, is frequently referred to by
the abbreviation "DOW." One of the most well-known and highly followed stock market
indices in the entire world, the DJIA is frequently used as a gauge for the general health of
the US stock market and the US economy.
Because the DJIA is a price-weighted index rather than a market capitalization-weighted
index, the stocks that make up the index are weighted according to their share prices. The
value of the index as a whole is thus more significantly impacted by stocks with higher
prices. The Wall Street Journal's editors chose the 30 stocks that make up the index to
represent a range of industries in the US economy.
The DJIA is determined by aggregating the market values of the 30 stocks that make up the
index, then dividing that total by a factor that takes into account stock splits, mergers, and
other corporate operations that could alter the index's value. The value of the DJIA, which is
shown in real time throughout the trading day, is the resultant figure.
The DJIA is frequently contrasted with other significant stock market indexes, like the S&P
500 and the Nasdaq Composite, as a benchmark for US stock market performance. Yet it's
crucial to keep in mind that the DJIA just represents a small portion of the entire US stock
market and is not always a reliable indicator of market success. To make wise trading
decisions, traders and investors frequently employ a number of indicators and research
approaches.

2. On Balance Volume
On Balance Volume (OBV) is a cumulative indicator that adds volume on up days and
subtracts volume on down days to quantify the purchasing and selling pressure. All of the
trading volume for the day is regarded as up-volume when the security closes higher than
the prior close. All of the day's volume is regarded as down-volume when the security closes
at a lower price than the prior close.
Concentrate on the OBV's direction rather than its actual value.
 The upward trend is expected to continue when the price and OBV are producing
higher peaks and higher troughs.
 The downward trend is expected to continue when both the price and the OBV are
making lower peaks and lower troughs.
 If the OBV increases during a trading range, accumulation may be occurring—a sign
that an upward breakout is imminent.
 If the OBV is declining during a trading range, distribution may be occurring—a sign
of a downward breakout.
 The increasing trend is likely to stagnate or fail when price keeps reaching higher
peaks but OBV doesn't. This is an example of a negative divergence.
 The downward trend is probably going to stagnate or fail if price keeps making lower
troughs but OBV doesn't. This is an example of a positive divergence.
Calculation:

When a security's price closes higher than its opening price, the day's volume is added to a
cumulative total, and when it closes lower, it is subtracted from the cumulative total.

If today's close is greater than yesterday's close then:

OBV = Yesterday’s OBV + Today’s Volume
If today’s close is less than yesterday’s close then:
OBV = Yesterday’s OBV – Today’s Volume
If today’s close is equal to yesterday’s close then:
OBV = Yesterday’s OBV

3. Money Flow Index

Money flow into and out of an investment over a predetermined time period is measured by
the Money Flow Index (MFI), a momentum indicator. It is similar to the Relative Strength
Index (RSI), but it also takes volume into account, whereas the RSI just takes price into
account. The MFI is calculated by first generating a Money Ratio and then adding together
the positive and negative Money Flow values (see Money Flow). The MFI oscillator form is
then created by normalising the Money Ratio.

Overbought levels usually occur over 80, while oversold levels frequently occur below 20.
These ranges could fluctuate based on the state of the market. The greatest peaks and the
deepest valleys ought to be crossed by level lines. In general, traders should examine
additional technical analysis or research to corroborate the security's turning point rather than
relying solely on oversold/overbought levels as a signal to buy/sell. Remember that the MFI
may be overbought or oversold for a long time during strong moves. This divergence can
indicate a price reversal if the underlying price sets a new high or low that isn't supported by
the MFI.
The Money Flow Index requires a series of calculations.

 First, the period's Typical Price is calculated.

Typical Price = (High + Low + Close)/3
 Next, Money Flow (not the Money Flow Index) is calculated by multiplying the
period's Typical Price by the volume.
Money Flow = Typical Price * Volume
 If today's Typical Price is greater than yesterday's Typical Price, it is considered
Positive Money Flow. If today's price is less, it is considered Negative Money Flow.
 Positive Money Flow is the sum of the Positive Money over the specified number of
periods.
Negative Money Flow is the sum of the Negative Money over the specified number of
periods.
 The Money Ratio is then calculated by dividing the Positive Money Flow by the
Negative Money Flow.
Money Ratio = Positive Money Flow / Negative Money Flow
 Finally, the Money Flow Index is calculated using the Money Ratio.
4. Average True Range

The average of the true ranges throughout the given period is known as the average true range
(ATR). ATR calculates volatility by accounting for any gaps in price movement. 14 periods,
which can be intraday, daily, weekly, or monthly, are typically used in the ATR calculation.
Use a shorter average, such as 2 to 10 periods, to gauge recent volatility. Use 20 to 50 periods
for volatility over longer time spans.

 When the range of each bar widens, a growing ATR signals a rise in market volatility.
The strength of a price reversal would be indicated by an increase in ATR. An
expanding ATR might signify either selling pressure or buying pressure because ATR
is not directional. High ATR readings are typically the outcome of a rapid uptrend or
downtrend and are not likely to last for an extended amount of time.
 ATR values below 1 imply a string of periods with narrow ranges (quiet days). The
prolonged sideways price action that produced these low ATR readings is what
caused the lower volatility. Low ATR values for an extended length of time could be
a sign of consolidation and the potential for a move or reversal to continue.
 ATR is a great tool for entry or stop triggers since it can indicate changes in volatility.
The ATR stop will adjust to sharp price changes or consolidation zones, which might
cause an anomalous price movement in either direction, unlike fixed dollar-point or
percentage stops, which do not allow for volatility. To detect these unusual price
movements, multiply the ATR by 1.5.

Calculation:

ATR = (Previous ATR * (n - 1) + TR) / n

Where:
ATR = Average True Range
n = number of periods or bars
TR = True Range
The True Range for today is the greatest of the following:
 Today's high minus today's low
 The absolute value of today's high minus yesterday's close
 The absolute value of today's low minus yesterday's close

5. Average Directional Index

Average Directional Movement Index, or ADX, is a tool that can be used to gauge a trend's
overall strength. An average of growing price range values makes up the ADX indicator. The
Directional Movement System, created by Welles Wilder, includes the ADX. The DMI+ and
DMI- indicators, together with the ADX, are used in this approach to attempt to gauge the
strength of price movement in both a positive and a negative direction.
According to Wilder, there is a strong trend when the ADX is above 25 and no trend when it
is below 20.

 The trend may be coming to an end if the ADX moves downward from high readings.
If you want to know whether closing open positions is right for you, you might want
to research more.
  The market may be showing signs of becoming less directional and the current trend
may be waning if the ADX is falling. Once the trend shifts, you might wish to refrain
from trading trend methods.
 The ADX may be offering a signal to trade the current trend if it climbs by 4 or 5
units, for instance, from 15 to 20 after having been low for a while.
 The market is displaying a stronger trend if the ADX is rising. The slope of the trend
is directly related to the ADX value. The ADX line's slope varies in direct proportion
to how quickly prices fluctuate (changing trend slope). The ADX number tends to
flatten out if the trend has a consistent slope.

Calculation:
ADX is simply the mean, or average, of the values of the DX over the specified Period.

6. Price Rate of Change

The Rate-of-Change (ROC) indicator, commonly known as Momentum, is an oscillator that
only measures momentum. The price "n" periods ago is compared to the price in the ROC
calculation. As the Rate-of-Change shifts from positive to negative, the plot develops an
oscillator that goes above and below the zero line. The overbought and oversold zones of the
ROC, like those of other momentum indicators, can be modified in accordance with the state
of the market. Keep in mind that a security may experience an extended period of overselling
or overbuying.

 A rapid price increase is reflected by an upward spike in the Rate-of-Change. A steep

price fall is indicated by a downward plummet. As long as the Rate-of-Change is
positive, prices are generally growing. In contrast, when the Rate-of-Change is
negative, prices are declining.
 As an advance gains momentum, the ROC moves into positive territory. The rate of
decline (ROC) deepens into negative territory.

Calculation:
ROC is the percentage change between the current price with respect to an earlier closing
price n periods ago.
ROC = [(Today’s Closing Price – Closing Price n periods ago) / Closing Price n periods ago]
x 100

7. Market Sentiment - Measures

Investor sentiment, which is another name for market sentiment, is not always based on the
fundamentals. Market sentiment is important to day traders and technical analysts because it
affects the technical indicators they employ to monitor and profit from short-term price
fluctuations that are frequently influenced by investor sentiments about a security. For
investors who prefer to trade against the grain of the existing consensus, market sentiment is
also crucial. If everyone is buying, for instance, a contrarian would sell.
Investors frequently distinguish between bullish and bearish market sentiment. Stock prices
are falling while bears are in charge. Stock prices are rising while bulls are in charge. The
stock market is frequently driven by emotion; therefore, market sentiment is not always the
same as intrinsic worth. In other words, while fundamental value is concerned with company
performance, market sentiment is concerned with feelings and emotion.

Indicators to measure market sentiment:

The VIX
Option prices are what determine the VIX, sometimes referred to as the fear index. The
market will want more insurance as the VIX rises. The necessity for traders to hedge their
positions against risk is an indicator of rising volatility. The VIX is given moving averages by
traders, which aid in determining if it is relatively high or low.
The High-low Index
The high-low index contrasts the proportion of stocks that reach 52-week highs against those
that reach 52-week lows. Stock prices are trading close to their lows when the index is below
30, and investors are in a pessimistic mood. Stock prices are moving towards record highs
when the index is above 70, and investors are bullish on the market. A specific underlying
index, such as the S&P 500, Nasdaq 100, or NYSE Composite, is often the index to which
traders apply the indicator.
Bullish Percent Index
The number of stocks having bullish patterns based on point and figure charts is tracked by
the bullish percent index (BPI). A bullish ratio of about 50% is present in neutral markets.
Stocks are likely overbought when the BPI registers a reading of 80% or greater, which
indicates excessively positive market sentiment. The market is oversold and market sentiment
is unfavourable when it measures 20% or lower.
Moving Averages
When assessing the mood of a market, investors frequently utilise the 50-day and 200-day
simple moving averages (SMA).
A "golden cross," or crossing of the 50-day SMA above the 200-day SMA, denotes an
upward shift in momentum and the emergence of bullish sentiment. In contrast, a "death
cross"—a crossing of the 50-day SMA below the 200-day SMA—indicates lower prices and
encourages negative sentiment.