TABLE OF CONTENTS

Chapter
TITLE Page No
No

ACKNOWLEDGEMENT 1

TABLE OF CONTENTS 2

LIST OF TABLES 3

LIST OF FIGURES 4

LIST OF ABBREVIATIONS 5

EXECUTIVE SUMMARY 6

1 INTRODUCTION 7

1.1 Introduction to the Topic 7

1.2 Background of the study

19

2 THEORETICAL FRAME WORK & REVIEW OF LITERATURE 14

3 RESEARCH METHODOLOGY
24

4 DATA ANALYSIS AND INFERENCE 30

5 FINDINGS OF THE STUDY 69

6 CONCLUSION 74

REFERENCES Xi

APPENDICES Xiv

EXECUTIVE SUMMARY

The growth of futures trading in commodity is tremendous; starting with trade in 7 commodities
till 1999, futures trading is now available in 146 commodities. There are more than 3000 members
registered with the exchanges. More than 20,000 terminals spread over more than 800 towns/cities of the
country provide access to trading platforms. According to Forward Markets Commission (FMC) data,
commodities worth Rs 77.65 trillion were traded in 2009-10, up by 48% compared to previous year and
more than 120 times of the value of business transacted since the introduction of electronic trading in
2003.
In the light of the observations the study aims at technical analysis based on two main
tools used in the financial market. with regard to the commodity futures market, fundamental analysis is
difficult to apply as we cannot get accurate supply and demand statistics of a particular commodity all
over the world. Hence technical analysis comes in as a handy tool for the investors.
This research work is mainly attempted towards study of the awareness of investors about
technical analysis in commodity trading and suggestion of some simple technical analysis tools to
increase their profitability. The study is confined to the period of four months covering January to april
2010. The sample size for the study was 50 . Frequency analysis was used to describe the variables. The
various statistical tools used were Chi square test, Analysis of Variance. It was found that 60 percentage
of the investors do technical analysis themselves. In this study the software-windsor4 was used for doing
technical analysis. There are hundreds of tool available for technical analysis of which the choosing the
combination of three tools namely Bollinger bands, RSI, PSAR, give 85% accurate predictions.

CHAPTER I

INTRODUCTION

1.1INTRODUCTION TO THE TOPIC:

 Commodity exchange operations are peculiar in nature and most of the Investors feel insecure in
managing their investment on the commodity market because it is difficult for an individual to identify
commodity which have growth prospects for investment. Further due to volatile nature of the markets, it
requires constant market watch and proper understanding and perception of price movements to capitalize
the growth opportunities and make more profit. Technical analysis is a method of evaluating securities by
analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts
do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify
patterns that can suggest future activity. There by increasing the profitability.

1.1.1. TECHNICAL ANALYSIS

There are two major types of analysis normally used to predict the performance of commodity
futures: fundamental and technical. Fundamental analysis examines the supply and demand factors that
influence price, while technical analysis is the study of price and price behavior. There are many different
types of technical analysis tools. Some rely on chart patterns others use technical indicators and
oscillators, and most use some combination of the two.
Applying technical analysis to charts allows commodity traders to identify patterns, trends as well
as other factors that affect price movement; which they then use to aid in buy and sell decisions.
Technical analysis includes such principles as the trending of prices, current prices discounting all-known
information, moving averages, volume effecting changes in price, and even the identification of support
and resistance levels in small and large periods from minutes to months.
The price of a commodity represents an agreement between buyers and sellers for all the
information about that commodity at any given point in time. It is the price at which one person agrees to
buy and another agrees to sell. This price at which a trader is willing to buy or sell depends primarily on
his/her expectations about the future. Technical analysis is a method of evaluating commodities by
analyzing statistics generated by market activity, past prices, indicators, and volume. Technical analysts
do not attempt to measure a commodity's intrinsic value; instead they look for patterns and indicators on
the charts that will determine the future performance.
Technical analysis reflects on historical prices in an effort to determine probable future prices.
This is done by comparing current price action with comparable historical price action in order to predict
a logical result. The premise with technical analysis is that history repeats itself in price behaviour
because human behaviour repeats itself. Although, market dynamics are constantly changing the
behaviour of the investor, namely fear and greed and how they play into the psyche of traders has not
changed over time.
1.1.2. ASSUMPTIONS BEHIND TECHNICAL ANALYSIS

The field of technical analysis is based on three assumptions:

i. The market discounts everything.

ii. Price moves in trends.

iii. History tends to repeat itself.

i. The Market Discounts Everything

Technical analysis only considers price movement, ignoring the fundamental factors of supply
and demand. However, technical analysis assumes that, at any given time, a commodity's price reflects
everything that has or could affect supply and demand. Technical analysts believe that the commodity's
supply and demand, along with broader economic factors and market psychology, are all priced into the
commodity, removing the need to actually consider these factors separately.

ii. Price Moves in Trends

In technical analysis, price movements are believed to follow trends. This means that after a trend
has been established, the future price movement is more likely to be in the same direction as the trend
than to be against it. Most technical trading strategies are based on this assumption.

iii. History Tends To Repeat Itself

Another important idea in technical analysis is that history tends to repeat itself, mainly in terms
of price movement. The repetitive nature of price movements is attributed to market psychology; in other
words, market participants tend to provide a consistent reaction to similar market stimuli over time.
Technical analysis uses chart patterns to analyze market movements and understand trends. Although
many of these charts have been used for more than 100 years, they are still believed to be relevant
because they illustrate patterns in price movements that often repeat themselves.

1.1.3. TOOLS USED IN TECHNICAL ANALYSIS

i. Types of charts
 • OHLC "Bar Charts" - Open-High-Low-Close charts, also known as bar charts, plot the span
between the high and low prices of a trading period as a vertical line segment at the trading time,
and the open and close prices with horizontal tick marks on the range line, usually a tick to the
left for the open price and a tick to the right for the closing price.
• Candlestick chart - Of Japanese origin and similar to OHLC, candlesticks widen and fill the
interval between the open and close prices to emphasize the open/close relationship. In the West,
often black or red candle bodies represent a close lower than the open, while white, green or blue
candles represent a close higher than the open price.
• Line chart - Connects the closing price values with line segments.
• Point and figure chart - a chart type employing numerical filters with only passing references to
time, and which ignores time entirely in its construction.

ii. Concepts

• Resistance - a price level which acts as a ceiling above prices

• Support - a price level which acts as a floor below prices
• Breakout - the concept whereby prices forcefully penetrate an area of prior support or resistance,
usually, but not always, accompanied by an increase in volume.
• Trending - the phenomenon by which price movement tends to persist in one direction for an
extended period of time
• Average true range - averaged daily trading range, adjusted for price gaps
• Chart pattern - distinctive pattern created by the movement of security prices on a chart
• Dead cat bounce - the phenomenon whereby a spectacular decline in the price of a stock is
immediately followed by a moderate and temporary rise before resuming its downward
movement
• Elliott wave principle and the golden ratio to calculate successive price movements and
retracements
• Momentum - the rate of price change
• Point and figure analysis - A priced-based analytical approach employing numerical filters which
may incorporate time references, though ignores time entirely in its construction.

iii. Overlays

Overlays are generally superimposed over the main price chart.

 • Resistance - an area that brings on increased selling
• Support - an area that brings on increased buying
• Trend line - a sloping line of support or resistance
• Channel - a pair of parallel trend lines
• Moving average - lags behind the price action but filters out short term movements
• Bollinger bands - a range of price volatility
• Parabolic SAR - Wilder's trailing stop based on prices tending to stay within a parabolic curve
during a strong trend
• Pivot point - derived by calculating the numerical average of a particular currency's or stock's
high, low and closing prices
• Ichimoku kinko hyo - a moving average-based system that factors in time and the average point
between a candle's high and low

iv. Price-based indicators

These indicators are generally shown below or above the main price chart.

• Advance decline line - a popular indicator of market breadth

• Average Directional Index - a widely used indicator of trend strength
• Commodity Channel Index - identifies cyclical trends
• MACD - moving average convergence/divergence
• Relative Strength Index (RSI) - oscillator showing price strength
• Stochastic oscillator - close position within recent trading range
• Trix - an oscillator showing the slope of a triple-smoothed exponential moving average

v. Volume-based indicators

• Accumulation/distribution index - based on the close within the day's range

• Money Flow - the amount of stock traded on days the price went up
• On-balance volume - the momentum of buying and selling stocks
• PAC charts - two-dimensional method for charting volume by price level

The basic tool is the chart along with that technical indicators and oscillators can be used.

1.1.5. COMMODITIES TRADED

 Based on the physical property the commodities traded have been distinguished into the
following type.

Commodity exchanges have gradually developed from physical markets where deals were made
out of warehouses to futures markets which allow for both hedging to protect the losses in a declining
market and speculation for gains in a rising market. The derivatives markets for futures were developed
initially to help agricultural producers and consumers manage their price risks.
Turnover in exchange-traded commodity derivatives increased from 2.8% of global exchange-
traded derivatives in 2003 to 4.3% in 2007. During this period commodities share of the number of
contracts outstanding increased from 6.7% to 10.9%. Prior to this, since the introduction of financial
futures in the 1970s, commodities’ relative contribution to overall derivatives exchange trading had
fallen.
Worldwide, there are around 50 major commodity exchanges that trade in more than 90
commodities. ‘Soft commodities’ are traded around the world and dominate exchange trading in Asia and
Latin America. Metals are predominantly traded in London, New York, Chicago and Shanghai. Energy
contracts are mainly traded in New York, London, Tokyo and the Middle East. More recently a number
of energy exchanges have emerged in several European countries. In terms of the number of futures
contracts traded, in 2007 China and the US had three exchanges amongst the largest ten, the UK two and
Japan and India one each (Table 2). The New York Mercantile Exchange was the largest commodities
exchange in the world followed by China’s Dalian Commodity Exchange and the Chicago Board of
Trade. The UK’s ICE Futures was fourth and the London Metal Exchange sixth. Trading on exchanges is
fairly concentrated. In 2007 the top five exchanges accounted for around two-thirds of contracts traded
globally slightly down on their 70% share in 2003.

1.1.5. Chart showing the Geographic split of exchange traded commodity trading

% share, number of contracts traded (of largest 25 exchanges), 2009

China and India have gained in importance in recent years with their emergence as significant
commodities consumers and producers. Over the past decade a number of large exchanges have opened in
China and India such as the Shanghai Futures Exchange, Zhengzhou Commodity Exchange and the
Dalian Commodity Exchange in China and the National Commodity and Derivatives Exchange and MCX
in India.

The following chart shows the relative importance of exchange traded commodities
 1.1.5. Table showing commodity-wise turnover

1.2. Background of the Study:

 The history of futures trading in commodities in India dates back to the later part of 19th century
when the first commodity exchange, the Bombay Cotton Trade Association Ltd was set up for organizing
futures trading. The early 20th century saw the mushrooming of a number of commodity Exchanges. The
principal commodity markets functioning in pre-independence era were the cotton markets of Bombay,
Karachi, Ahmedabad and Indore, the wheat markets of Bombay, Hapur, Karachi, Lyallpur, Amritsar,
Kara and Calcutta; the groundnut markets of Madras and Bombay; the linseed markets of Bombay and
Calcutta; Jute and Hessian markets of Calcutta; Bullion markets of Bombay, Calcutta, Delhi and Amritsar
and sugar markets of Bombay, Calcutta,Kanpur and Muzaffarnagar. There were no uniform guidelines or
regulations.
In order to provide constant vigil to prevent crisis, a comprehensive legislation was enacted by
the Bombay State called Forward Contract (Regulation) Act 1952. which provided the legal framework
for organizing forward trading in the country and provided, inter alia, for recognition of Exchanges. This
framework continues to exist even today. One of the important features of this Act is to notify a
commodity for prohibition or regulation of forward contract. Under these provisions, a large number of
commodities were notified for prohibition during the 1960s which left only a handful of insignificant
commodities open for forward trade. This scenario continued for about four decades although the
Dantawala Committee (1966) and Khusro Committee (1980) had recommended steps to revive futures
trading in more agriculture commodities.
Subsequent to liberalization of Indian economy in 1991, a series of steps were taken to liberalise
the commodity forward markets. The Kabra Committee (1994), the earliest post-1991, recommended
opening up of futures trading in 17 selected commodities.The year 2003 is a watershed in the history of
commodity futures market. The last group of 54 prohibited commodities was opened up for forward
trading, along with establishment and recognition of three new national exchanges with on-line trading
and professional management. Prohibition on forward trading was completely withdrawn. The new
exchanges brought capital, technology and innovation to the market. These markets notched up
phenomenal growth in terms of number of products on offer, participants, spatial distribution and volume
of trade. Starting with trade in 7 commodities till 1999, futures trading is now available in 146
commodities. Almost all of this (97.2%) of this is now accounted for by the three national exchanges. The
other 21 Exchanges have a miniscule share in the total volume.
The growth in the commodity derivative trading witnessed in 2005-06 continued during
2006-07. Total volume of trade rose sharply from Rs. 1.29 lakh crore in 2003-04 to Rs. 27.39 lakh crore
in 2006-07 (till December 2006) (Table 4.15). In the first nine months of 2006-07, the volume of trade
was already more than Rs. 21.55 lakh crore achieved in the twelve months of 2005-06. Turnover as a
proportion of GDP increased from only 4.7 percent in 2003-04 to 18.3 per cent in 2004-05 and further to
76.8 per cent in 2005-06. The growth in the volume of trading has been primarily propelled by
Multi Commodity Exchange, Mumbai (MCX) and National Commodity Derivatives Exchange, Mumbai
(NCDEX)

1.2.1. Table showing month wise value of trade

The growth in commodity futures trade has spawned an upsurge of interest in a number of
associated fields, viz. research, education and training activities in commodity markets, commodity
reporting for print and visual media, collateral management, commodity finance, ware-housing, assaying
and certification, software development, electronic spot exchanges etc. Markets and fields almost non-
existent four years ago now attract significant mind-share nationally and internationally.
 With such a growth the commodity trading requires the attention of the investors in commodity
futures to expand and update their knowledge in trading to gain profit. Fundamental analysis is difficult to
apply when we consider the commodity market, as the supply and demand statistics pertains to various
nations and it is not commonly available like stock market. This brightens the use of technical analysis for
commodity trading.

1.3 Need for the study

Commodity futures’ trading is expanding. To make profits we must know about the commodities
and factors influencing the price. Though fundamental analysis is the preferred method of evaluation of
securities it is difficult in commodity futures market because we cannot predict the exact supply and
demand condition of the commodity since it requires worldwide detail. Hence we go for technical
analysis where we use the price and past patterns to predict the future pattern of price of the commodity.

1.4 Scope of the study

Investment in commodity markets has been very popular and rewarding for investors in U.K. and
U.S.A. Its expanding in India and the participants are increasing day by day. For investors looking for
diversification beyond stock markets, commodity markets offer another investment option. The
commodity markets activity, volume and players multiplied in the recent past. In India, although the
trading in commodity markets and commodity exchanges is booming, it has to cross few more hurdles
like permitting Fills, banks and other financial institutions to operate in these markets. It is obvious that
the market will grow and hence the number of players will increase in such a case technical analysis
would gain its importance and the knowledge about it would become an advantage.

1.5 Objectives of the study:

1.5.1 Primary Objective

The main objective of the study is

• To identify the technical analysis tools generally used

• To assess the profitability of each individual technical analysis tool .

• To find out combination of tools which give more profit.

1.5.2 Secondary Objectives:

• To know what percentage of the investors use technical analysis

• To know about the perceptions of the investors regarding their selection of commodities.

• To understand the risk appetite of the investors and if it got any relationship with their knowledge
about technical analysis.

• To know about how the investors get advice for their investment decisions and what are the
popular means of making the decision

• To know the investor’s knowledge of technical analysis and market watch and its relationship
with the different ranges of returns earned by them.

1.6 Limitations of the study

This study has the following limitations

• The Sample of commodities is very small (three) when compared to the entire list of commodities
which are allowed to be traded in India through commodity exchanges.

• The Sample of indicators is considered is only 6

• The sampling of investors is restricted to Coimbatore region only.