PROJECT SEMESTER REPORT

Undertaken at

FUTURES FIRST INFO. PVT. LTD.

On

FINANCIAL MARKET ANALYSIS

Submitted by:-
Tanmay Srivastav
101704126

Under the Guidance of

Host Mentor Faculty Supervisor

Mr. Ishu Agarwal Dr. Amit Kumar
Research Associate Assistant Professor
Futures First, Gurugram TIET, Patiala

2021

Electrical and Instrumentation Engineering Department

Thapar Institute of Engineering and Technology, Patiala
(Declared as Deemed-to-be-University u/s 3 of the UGC Act., 1956)
Post Bag No. 32, Patiala – 147004
 DECLARATION

I hereby declare that the Project entitled “Financial Market Analysis” is an authentic record
of my own work carried out at Futures First, as a requirement of project semester for the
award of degree of B.E. Electrical Engineering, Thapar Institute of Engineering and
Technology, Patiala, under the guidance of Mr. Ishu Agarwal and Dr. Amit Kumar,
Assistant Professor, EIED starting from 1st February, 2020.

Date: 28/05/2021 Name:- Tanmay Srivastav

i
 ACKNOWLEDGEMENT

It gives me immense pleasure to take this opportunity to thank Futures First Info Services Pvt.
Ltd. for giving me such a great opportunity to do my internship project in their esteemed
organization in Gurugram. I deem it my privilege to have carried out this internship program in a
quality conscious organization. Futures first, being one of the most competitive corporations in
India, gave me the opportunity to learn the work carried out here and gave me a glimpse of a new
environment.

I would like to express my sincere gratitude and indebtedness to my project mentor, Mr. Ishu
Agarwal for his invaluable guidance, encouragement & comforting behavior, which helped me to
complete my internship successfully and shall carry me a long way in the journey of life on which
I am about to embark. His way of working was a constant motivation and exposure to all aspects
of an organization.

I would also like to take this opportunity to express my sincere gratitude to my faculty mentor, Dr.
Amit Kumar, for his constant guidance, valuable suggestions and moral support. I acknowledge
gratefully the help and suggestion of Futures First employees who were always eager to help me
with their warm attitude and technical knowledge, in spite of their busy schedule and huge
workload.

Finally, no word will be enough to express my deepest reverence to family and friends without
whose enthusiasm and support, I wouldn’t have been able to pursue my goals.

ii
 ABSTRACT

he report highlights the strategies used in the mar ets or the oybean utures, whi h ould also
be used with the other international markets, commodities, shares and indices. The most commonly
used strategies of futures contract for any listed company on the exchange or any commodity
mar et is outrights, spreads and ly. hese are applied to oybean along with their di erent
combinations i.e, outright vs spread, smaller spread vs another larger spread etc. to minimise the
risk involved so as to have a suitable amount of net gain from the market. These strategies are
traded based on the charting analysis of the market which is the study of the candlestick charts,
their special patterns, geometrical analysis and some key price patterns. They offer great values if
these are applied in conjunction with the technical indicators.

he basi undamentals o mar ets are also highlighted whi h helps in building the strategy or one
month spread which involves the minimum risk with comparison to other spreads and outrights.
The market participants like hedgers, speculators and arbitragers also plays a keen role in affecting
the prices of the oil. There are many other derivative contracts like options, forwards, OTC other
than the futures contract but more emphasis has been laid on the futures contract because of the
liquidity present in it.

Author of the Report: Tanmay Srivastav

Certified by Industry Mentor: Mr Ishu Agarwal

erti ied by a ulty entor r. mit umar

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iv
 TABLE OF CONTENTS

DECLARATION i
ACKNOWLEDGEMENT ii
ABSTRACT iii
LIST OF FIGURES vii
CHAPTER 1: ABOUT THE COMPANY 1
CHAPTER 2: INTRODUCTION AND OBJECTIVES 3
2.1 INTRODUCTION 3
2.1.1 Financial Market 3
2.1.2 Derivatives Market 5
2.2 OBJECTIVES 8
CHAPTER 3: METHODOLOGY 9
3.1 TRADING 9
3.1.1 Trading Time Frames 10
3.1.2 Types of traders 11
3.2 SOFTWARE 15
3.2.1 Price 15
3.2.2 Order Book… 18
3.2.3 Trade 19
3.2.4 Risk… 20
3.2.5 Types of Orders 20
3.3 OUTRIGHTS, SPREAD AND BUTTERFLY SPREAD… 22
3.3.1 Outrights 22
3.3.2 Spreads 23
3.3.3 Butterfly Spread… 23
3.4 STRATEGIES USED TO ANALYSE THE MARKETS 24
3.4.1 Price Action 25
3.4.2 Charting Techniques 25
3.5 TECHNICAL ANALYSIS 35

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 3.6 GEOMETRICAL ANALYSIS 44
CHAPTER 4: RESULTS AND DISCUSSIONS 48
4.1 PROPOSED MODEL 48
4.2 DEVELOPING CIRCUITS FOR ALGORITHM 49
4.3 TOOLS USED… 50
CHAPTER 5: CONCLUSION AND FUTURE SCOPE OF WORK 54
REFERENCES 55
APPENDIX-A 58
Plagiarism Report 89

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 List OF Figures

Figure 2.1: Types of markets 4

Figure 2.2: Categorization of derivatives 6
Figure 3.1: Product selection window 16
Figure 3.2: Column picker window 16
Figure 3.3: Price ladder 17
Figure 3.4: Order entry 18
Figure 3.5: Price ticker window 19
Figure 3.6: Working order window 19
Figure 3.7: Trade window. 20
Figure 3.8: Risk Window. 20
Figure 3.9: Order types 21
Figure 3.10: Chart representing the upward trend in the market 25
Figure 3.11: Chart representing consolidation in the market 26
Figure 3.12: Support and Resistance levels observed in daily chart 27
Figure 3.13: Breakout observed in a futures Jan’18 contract 1D chart at $58 level 28
Figure 3.14: Bearish engulfing candle observed in a Brent oil outrights contract 29
Figure 3.15: Morning star candle observed in an outrights chart 30
Figure 3.16: Piercing line pattern 31
Figure 3.17: Piercing line candle observed in a Brent chart 32
Figure 3.18: Hanging Man Candle 33
Figure 3.19: Shooting star candle 34
Figure 3.20: Shooting star formation and immediate downtrend. 34
Figure 3.21: Bullish Harami observed in a 15 min Brent outrights chart 35
Figure 3.22: Simple moving average applied on a daily chart on S&P 500 37
Figure 3.23: EMA on a IBM chart 39
Figure 3.24: Crossovers observed on a S&P chart 40
Figure 3.25: RSI indicator showing overbought and oversold conditions in the market 41

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Figure 3.26: Bollinger bands predicting the next move 43
Figure 3.27: Double bottom observed in a Brent Oil 15 min chart 44
Figure 3.28: Double Top observed in a Brent 1 min chart 45
Figure 3.29: Schematic of a Head and Shoulder pattern 46
Figure 3.30: Fibonacci Retracement levels in the market 46
Figure 4.1: Sample Automatic Algorithm 49
Figure 4.2: Autospreader Front-end 49
Figure 4.3: Bollinger Bands 50
Figure 4.4: SMA of 200 periods 51
Figure 4.5: EMA of different periods 51
Figure 4.6: Comparison between EMA and SMA 52
Figure 4.7: Formula for calculation of 14 Period ATR 53

viii
 CHAPTER 1
ABOUT THE COMPANY

Futures First is a wholly owned subsidiary company of the much larger Hertshten Group.
Incorporated in March 2005 and registered in Mauritius, Hertshten Group Ltd is regulated by the
Financial Services Commission in Mauritius, a globally-recognized regulatory authority.

Hertshten Group’s strategic aim is to create and build complementary businesses with high growth
potential in developing economies on a global scale. Our global geographical presence allows us
to explore opportunities and to diversify our portfolio.

Hertshten Group invested in Futures First, which operates in India, China, UK, Israel and Kenya.
These companies provide professional research and advisory services in global derivatives
markets. They also bring unique job opportunities to these regions as top graduates of the most
renowned universities in these countries are attracted to the challenge of engaging in international
financial markets from their home country.

Hertshten Group was incorporated in March 2005 by Gedon Hertshten and a couple of individuals
in Mauritius with an aim to create and build complementary businesses with high growth potential
in developing economies on a global scale. This company is one of its kinds in India. It is basically
a proprietary trading group which trades in international exchanges. The work culture is great but
at the same time very demanding. It is a little infamous for its high attrition rate in the industry
which is understandable due to the nature of the job people are involved into. The working hours
are long but fixed. You are hired to be a futures trader which is one of the most financially
rewarding jobs in the industry. But the efforts needed and the understanding of the market required
is immense [1].

Futures First didn’t hesitate a little in providing the very same facilities to its full time employees
and interns, infact interns were almost treated the same way as that of the full time employees. The
company provided a simulation software which displays the live market data so that the correct
analysis can be done. Further, the software also displays the candlestick charts on which
geometrical tools and technical indicators can be applied. All the resources were already provided
to develop a deep understanding of the fundamentals. Regular meetings and one to one

1
discussions were also arranged with the mentors to clear the doubts regarding the happenings in
the market and the modification in the trading style depending on the market.

2
 CHAPTER 2
INTRODUCTION AND OBJECTIVES

2.1 INTRODUCTION
Trading in a financial market is buying the security at lower price and selling at the high or selling
at high and buying at low. It requires the thorough analysis of the market to predict the price
movements. One should choose the financial market depending on the person‟s capability of
taking risk.

2.1.1 FINANCIAL MARKET

A financial market is a broader term describing any marketplace where buyers and sellers
participate in the trade of assets such as equities, bonds, currencies, derivatives and commodities.
Financial markets are defined of having transparent pricing, basic regulations on trading, costs and
fees, with market forces determining the prices of securities that trade [2].

Financial markets can be found in nearly all the nations of the world. Some are reasonably small,
with only a few participants, while others - like the New York Stock Exchange (NYSE) and the
forex markets - trade trillion dollars daily.

The term "market" is sometimes used for what are more strictly exchanges, organizations that
facilitate the trade of financial instruments, e.g. a stock exchange or commodity exchange. This
may be a physical location (like the NYSE, BSE, Nifty) or an electronic system (like NASDAQ).
Much trading of stocks takes place on an exchange; still, corporate actions (merger, spinoff) are
outside an exchange, while any two companies or people, for whatever reason, may agree to sell
stock from the one to the other without using an exchange [3].

Financial Markets can be categories into various types based on the duration of the securities
(Figure 2.1).
(a) Capital Market
(b) Money Market

3
 Figure 2.1: Types of financial markets

Capital Market

A capital market is one in which an individuals or an institutions trade financial securities with the
aim of making a profit. Organizations and institutions in the public and private sectors also often
sell securities in the capital markets in order to raise funds. Any government or corporation requires
capital to finance its operations and to engage in its own long-term or short term investments. To
do this, a company raises capital through the sale of it’s securities - stocks and bonds in the
company's name. These are bought and sold in the markets [4]. Capital markets are defined as
markets in which money is provided for a period longer than a year. Capital markets channelize
the wealth of savers to those who can put it to long-term productivity, such as companies or
governments making long-term investments [5].

Equity Market

The market in which shares are issued and traded, either through exchanges or over-the-
counter(OTC) markets is the equity market. Also known as the stock market in the financial world,
it is one of the most vital areas of a market economy because it gives companies access to capital
and investors a slice of ownership in a company with a potential to realize gains based on its
performance in the the future [6].
4
 Primary and Secondary Market

The stock market can be split into two main types internally: the primary and the secondary market.
The primary market is where securities are first sold through initial public offerings (IPOs).
Institutional investors typically purchase most of these shares from investment banks, the worth of
the company "going public" and the amount of shares being issued determine the opening stock
price of the IPO. All subsequent trading goes on in the secondary markets, where participants
include both individual and institutional investors. (A company uses money raised from its Initial
Public Offering (IPO) to grow, but once its stock starts trading, it does not receive funds from the
buying and selling of its securities). In the primary capital market, investors buy directly from
company issuing the securities. In the secondary market, investors trade securities among
themselves. After the initial issuance, investors can purchase from other investors in the secondary
market [7].

2.1.2 DERIVATIVES MARKET

A derivative is a security with a price that does not have a value of it’s own and is dependent upon
or derived from one or more than one underlying assets. The derivative itself is a contract between
two or more than two parties based upon the asset or assets. Its value is determined by fluctuations
in the value of the greater underlying asset. The most common underlying assets include stocks,
bonds, commodities, currencies (Forex), interest rates (Bonds) and the market indexes.

Derivatives either be traded over-the-counter (OTC) exchanges or on an physical exchange. OTC

derivatives constitute the greater proportion of derivatives in existence and are unregulated,
whereas derivatives traded on various exchanges are standardized. Over The Counter derivatives
generally have greater risk for the counterparty than do standardized derivatives.

The derivatives market is a type of financial market where derivatives i.e. commodities or
financial instruments like futures or options, whose value is derived from other forms of assets are
bought and sold. The market can be divided into two, that for exchange-traded derivatives and that
for over-the-counter derivatives (Figure 2.2).

5
 Figure 2.2: Categorization of derivatives

Options

An option is a derivative that represents a contract sold by one individual (the option writer) to
another individual (the option holder). The contract offers the buyer the right, but not an obligation,
to buy (call) or sell (put) a financial security or other assets at a mutually agreed-upon price (the
strike price) during a certain period of time or on a specific date (exercise date).

Call options give the option to buy at certain price, so the buyer would want the stock to go up.
Conversely, the option holder needs to provide the underlying shares in the event that the stock's
market price exceeds the strike because of the contractual obligations. An option holder who sells
a call option believes that the underlying stock's price will see a drop relative to the option's strike
price during the life of the option, as that is how it will help him reap maximum profit.

This is exactly to the opposite of the outlook of the option buyer. The buyer believes that the
underlying stock will see a rise in value; if this happens, the buyer will be able to acquire the stock
for a lower price and then sell it for a profit. However, if the underlying stock does not close above
the strike price on the date of expiration, the option buyer would lose the premium he paid for the
call option [8].

Put options give the choice to sell at a certain price, so the buyer would want the stock to go down.
The opposite is true for put option writers. For example, a put option buyer is having a bearish
outlook on the underlying stock and believes its market price will go below the specified strike

6
price on or before a specified date. On the other hand, an option writer who shorts a put option
believes the underlying stock's price will increase about a specified price on or before the
expirationdate.
If the underlying stock's price closes above the specified strike price on the expiration date, the put
option writer's maximum profit is achieved. Conversely, a put option holder would only benefit
from a fall in the underlying stock's price below the strike price. If the underlying stock's price
falls below the strike price, the put option writer is obligated to purchase shares of the underlying
stock at the strike price.

Forward Contract

A forward contract is a customized contract between two parties to buy or sell an asset at a specified
price on a future date. A forward contract can be used for hedging or speculation, although its
non-standardized nature makes it particularly apt for hedging. Unlike standard futures
contracts, a forward contract can be customized to any commodity, amount and delivery date. A
forward contract settlement can occur on a cash or delivery basis. Forward contracts do not trade
on a centralized exchange and are therefore regarded as over-the-counter (OTC) instruments.
While their OTC nature makes it easier to customize terms, the lack of a centralized clearinghouse
also gives rise to a higher degree of default risk. As a result, forward contracts are not as easily
available to the retail investor as futures contracts.

Futures Contract

A futures contract is a legal contractual agreement, generally made on the itrading floor iof a
exchange, to buy or isell a particular commodity ior ifinancial instrument at a ipredetermined price
at a specified time in the ifuture. Futures contracts facilitate trading on a ifutures exchange and,
depending on the iunderlying asset being traded, detail the quality and quantity of the icommodity.

Some futures icontracts may call for iphysical delivery of the asset, while others are settled in cash
without delivery. The terms "futures icontract" and simply "futures" refer to iessentially the same
thing. For example, you might hear isomebody say he ibought oil futures, which imeans the same
thing as an oil futures contract. To get more ispecific, one could say that a futures icontract refers
only to the i specific

7
characteristics of the iunderlying asset being itraded, while "futures" is more general and can also
refer to the ioverall market ias in: "He is a futures trader."

2.2 OBJECTIVES

The present project has been carried out with the following objectives:

a) To understand the basic fundamentals of Futures Market with emphasis on Soybean

Futures, factors affecting it and it’s capacities,

b) Research the Futures Market and perform statistical analysis on previous years data and
devise profitable strategies,

c) To develop strategies for Futures Market other than the avalible ones to minimize the risks,

d) To automate the strategies using the Alogorithm Development toolbox provided,

e) Management of risk/reward ratio of the trades depending upon the price action,

f) To understand the fundamentals affecting the Soybean Commodities Futures,

g) To understand the technical analysis and it’s application in conjunction with the charting
techniques and price patterns.

8
 CHAPTER 3
METHODOLOGY

3.1 TRADING

Trade is a common ieconomic concept involving the buying and selling of goods and services
between more than ione parties, with compensation paid by a buyer to the seller for the exchange
of goods or services between itwo parties. The most common medium of exchange for these
transactions is the icurrency, but trade can also be executed with the exchange of goods or services
between two parties, referred as a barter system, or a payment with a virtual currency, the most
popular of it is bitcoin. In Global financial markets, trading refers to the buying and selling of
securities, such as the purchase of a stock on the floor of the New York Stock Exchange (NYSE)
or Bombay Stock Exchange (BSE) in Mumbai [10].

Trade refers to transactions ranging from the exchange of ibaseball cards between collectors to
multinational policies setting iprotocols for imports and exports between two icountries.
Regardless of the complexity involved in the itransaction, trading is facilitated through three
primary types of exchanges. Trades are executed with the ipayment of a country’s sovereign
icurrency, the exchange of goods and services, or payment with a virtual icurrency [11].

For many years stock exchanges were at the physical locations where buyers and sellers met each
other and negotiated the pricing. Exchange trading typically happens on the floor of a trading
exchange, where traders in color coded jackets (to identify which firm they worked for) would
shout and gesticulate at each other – the process is known as open outcry or pit trading (the
exchange floors were often pit-shaped – circular and sloping downwards towards the centre, so
that the traders could see each other). With the development of communication technology
espacially because of the Internet in the late 20th century, the need for a physical location became
less and less important as the time passed and traders started to transact from remote locations in
what became known as electronic trading. It made transactions easier to complete, monitor, clear,
and settle and this helped spur on its development [12].

As trading is very easy to get iinto, new traders may not irealize the steep learning curve involved;
being successful is idifficult, and it takes a lot of time and effort. Here are isome quick facts iabout
9
trading:

 More than 90% of day traders fail within the first year

 There is no way to completely eliminate risk involved in trading

 There is no trading system that wins almost 100% of the time

 You will surely have losing trades, even if you are a rock star trader

 To make money you need money – it will take a long time to get enough with a small
trading account

 Successful independent traders can earn a comfortable income, but most do not become
millionaires [13].

3.1.1 Trading Time Frames

The type of investments where position is held for a period of years or even decades, traders buy
and sell stocks, commodities, currency pairs and various other investment instruments with the
intention of generating returns that outperform a buy-and-hold strategy. Trading profits are viewed
as income since profits are “taken off the table” on a regular basis (as opposed to the investing,
where positions are generally left alone for a long time frame).

10
Profits in trading is achieved through buying low and selling high - and selling high and buying
low, in the case of short selling - and all trades are closed within a relatively short period of time.
This time period can vary from a few seconds to months or even years, depending on the trader‟s
style of trading. The following chart lists the four primary trading styles- position, swing, day and
scalp - with the corresponding time frames and holding periods for each [14].

Position Trading

Position trading consists of the longest trading time frame, and trades generally span over a period
of few months to years, these traders may use a combination of technical and fundamental analysis
to make trading decisions, and often refer to weekly and monthly price charts when evaluating the
markets. Typically, short-term price fluctuations are ignored in favour of identifying and
profiteering from the longer-term trends. This style of trading most closely resembles to that of the
investers; however, while buy-and-hold investing typically involves long trades only (profiting
from a rising market), position traders may utilize both long and short trading strategies.

Swing Trading

Swing trading refers to a style of trading in which positions are held for a period of days or even a
few weeks in attempt to capture the shorter-term market moves. In general, swing traders rely
mostly on technical analysis and price action to determine profitable trade entry and exit points,
paying less

11
attention at the fundamentals of the market. Trades are exited when a previously established profit
target is reached prefferably, the trade is stopped out after a set amount of time has elapsed or the
Stop point has reached. Because swing trading takes place over a period of few days to weeks
(with an average of one to four days at the minimum), this trading style does not necessarily require
constant monitoring of the markets. As such, traders who are unable to monitor their positions
throughout each trading session often gravitate toward this popular style of trading the markets.

Day Trading

Day trading refers to a style of trading in which positions are bought and sold on the same day.
Unlike position and swing traders, a day trader does not hold any positions overnight, and all trades
are closed at the EOD or when the profit target is achieved. Day traders typically use the technical
analysis to find and exploit intraday price movements, viewing intraday price charts with minute,
tick and/or volume based charting intervals. Because trades are held for a longer period time, large
price moves are uncommon, so day traders rely on frequent small gains to build their profits. To
leverage their strategy, day traders usually trade with margin. Day trading is a full-time job since
positions have to be constantly monitored and traders need to be immediately aware of any
interruptions in the technology chain (for example, a poor Internet connection or the trading
platform issue).

Scalp Trading

Scalp trading is an extremely active form of day trading that involves frequent buying and selling
of securities for the entire trading session. Scalp traders target the smallest intraday price
movements and rely on frequent and very small gains to build profits, since the gains are small on
any one trade, scalpers may place dozens or even hundreds of trades each trading session; as a
result, it's very imporatant that scalpers have an access to low trading commissions. It should be
noted that scalp form of trading is considered very risky because it relies on having a high
percentage of profiteering trades and because the average winning trade in general is many a times
smaller than the average losing trade, it can take just one or two losing trades to wipe out all of
your profits earned. Precision is of paramount with this style of trading, and scalping requires
constant attention to the markets.

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3.1.2 Types of traders

Participants in a derivative market can be segregated into four sets based on their trading motives
which are:

 Hedgers
 Speculators
 Margin Traders
 Arbitrageurs

Hedgers

Hedging would simply mean the reduction of risk involvement. An investor who is looking at
reducing his/her risk is known as a Hedger. A Hedger would typically look at reducing his asset
exposure to price volatility in the financial markets, would usually take up a position that is
opposite to the risk he is otherwise involved. Hedgers primarily look at limiting their risk exposure.
This is done by using other derivative tools and ensuring limited losses in case of unfavorable
movements in the underlying instrument.

Speculators

Speculators hypothesize the expected price movements and take positions accordingly that would
lead to maximize the profit. Speculators are extremely high risk takers who are in the Financial
markets for the purpose of making profits from market movements. They need to effectively
forecast the market trends to take positions that don’t in any way guarantee safety of invested
capital or returns. Speculators rely on fast moving trends to forecast possible future market moves
– these could range from changing consumer tastes to the fluctuating rates of interest, economic
growth indicators and coinciding it with the market entry timing etc. Speculators can make big
profits or a similarly huge loss and are typically high net individuals looking to diversify holding
with a view to maximize profits at a short period of time.

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 Margin Traders

Margin is a pretty high-risk trading strategy that can yield a huge profit if it is executed correctly.
The dark side of margin is that you can lose everything in it. One of the things riskier than investing
on margin is investing without understanding what you're doing. Buying on margin is borrowing
money from a broker to purchase the asset. One can think of it as a loan from your broker. Margin
trading allows individuals to buy more assets than you would be able to normally. To be able to
trade on margin, you need a margin account. This is a bit different from a regular cash account, in
which you trade using the money in your own account. By law, your broker is required to obtain
your original signature to open a margin account for you. The margin account may be part of your
standard account opening agreement or may be a completely separate mutually agreed contract.

Firstly, Initial Margin is the initial amount you can borrow. Secondly, The maintenance margin,
which is the amount you need to maintain after you trade. These amounts are set by the regulatory
authorities, as well as your brokerage. Individual brokerages can have stricter limits, but the
Federal Reserve Board in the USA sets a minimum initial margin of 50% and a maintenance
margin of at least 25% or more.

Margin accounts are risky and is not for everyone. Leverage is a double-edged sword, amplifying
the losses and gains to the same degree. In fact, one of the meanings of risk is the degree that an
asset swings in price. Because leverage amplifies these swings, by definition, it increases the risk
involvement of your portfolio [16].

Arbitrageurs

These play in an extremely fast paced environment with decisions taken at a moment’s notice.
Sometimes the price of a asset in the cash market is lower or higher than it should be, in comparison
to its price in the derivatives market. Arbitrageurs exploit these market imperfections and
inefficiencies to their profiteering advantage. They also play a very important role in increasing
liquidity into the market thus making it more liquid. There are various arbitrage opportunities that
can be explored in the financial market especially in derivatives. Cash-Futures arbitrage is one of
the simplest forms. If the futures price is trading at a premium to the value of its underlying asset;
it is referred to as a Contango and the reverse is Backwardation.

14
3.2 SOFTWARE

The main software applications consist of:

 Price – shows market prices and is where you place your orders.
 Order Book – shows the orders you are working and historic orders.

 Trade – shows the trades that you have done.

 Risk – shows your position and profit and loss information.

3.2.1 Price

This is the main software application, where most of the trading will be done. Various windows
forming a part of it are:

3.2.1.1 Product Selection

3.2.1.2 Column Picker

3.2.1.3 Depth and Ladders

3.2.1.4 Order Entry

3.2.1.5 Price Ticker

Product Selection

15
 Figure 3.1: Product selection window [18]

Column Picker

Figure 3.2: Column picker window [18]

16
Column Picker is used to:

 Change the color of a column.

 Add a new column – for example „Net Change‟, „High Price‟, „Low Price‟

Change the appearance of this new column - for example turn on +/- highlighting.

Depth and Ladders

This is the main working area where orders are placed, removed and viewed or amended. Figure
3.6 shows the price ladder of the Euribor market. Price ladder displays the Bid quantity, Ask
quantity and the current price.

Figure 3.3: Price ladders [18]

17
 Order Entry

This window shows how to place orders on the ladder. In the ladder, left click on the quantity to
submit an order at that level. Volume will show next to the total market volume and the order
will be highlighted in a yellow.
Status bar feedback at the bottom of the ladder shows the order being submitted. This will also
appear in the order log. (Figure 3.7)

Figure 3.4: Order entry [18]

Price Ticker

This window shows all the trades that are being executed in the market at real time. (Figure 3.8)

18
 Figure 3.5: Price ticker window [18]

3.2.2 Order Book

Figure 3.9 shows the application which displays the orders. There are two windows that show
orders, „Working and Completed‟.

Figu
gurre 11.11. Wororkking orOrddeerrssW
Win
inddoow
w

Figure 3.6: Working order window [18]

3.2.3 Trade

This window shows all the executed trades. Various filters can be applied to view the trades day-
wise, product-wise, etc. (Figure 3.10)

19
 Figure 3.7: Trade window [18]

3.2.4 Risk

This window shows the Profit and loss in all the traded products. Also, it resets when any of the
markets has a break. (Figure 3.11)

Figure 3.8: Risk window [18]

3.2.5 Types of orders

The order type you use to place a trade can have an influence on the outcome of the trade one is
into, thsese are instructions that are sent to brokers to enter or exit a position. While it can be very
simple to enter and exit a position – push the buy button to get in to the tradeand press the exit
button when it’s time to get out of the trade – trading in this manner is both inefficient and risky
[19].

20
If you trade just using the buy and sell buttons, you can sustain losses from slippage and trading
without a Stop Loss.

Figure 3.12 shows the various types of orders.

Market
Order
s
Condit
i Limit
onal Type Order
Order s s
of
Stop
Loss Stop
Order Order
s s
Figure 3.9: Order types

3.2.5.1 Market Orders

A market order is one of the most basic type of order. It tells the broker to buy (or sell) at the best
price which is currently available. Order entry interfaces and many apps usually have enter and
exit simultaneously to make these orders quick and easy. Typically, this type of order will be
guaranteed to be executed immediately. The primary advantage of using a market order is that you
are guaranteed to get the trade completed avoiding any chance of not getting it.

3.2.5.2 Limit Orders

A limit order is an order to enter at a specified price or better. A buy limit order (a limit order to
buy) can only be executed at the specified price or lower as per the will of the individual.
Conversely, a sell limit order (a limit order to sell) will be executed at the specified limit price or
at a higher price. Unlike a market order where you simply press a button and let the market select
the price, you must specify a price when using a limit order.

3.2.5.3 Stop Orders

A stop order to buy or sell becomes active only when a specified price level has been reached i.e.
(the “stop level”). The placement of stop orders differs from that of limit orders: a buy stop order

21
 is placed above the price one bought, and a sell stop order is placed below the price one sold to
minize the losses.

Once the stop level has been reached by the market, the order is automatically triggered and gets
changed into a market or limit order and, in this sense.

3.2.5.4 Conditional Orders

Conditional orders are used in advanced algorithmic trading these orders are automatically
submitted or cancelled if specified criteria are not met. Conditional orders must be placed before
the trade is taken and is considered the most basic form of trade automation.

3.3 OUTRIGHTS, SPREAD AND BUTTERFLY SPREAD

3.3.1 Outrights

An outright contract is purchase or sale of a contract for delivery at any forward date beyond two
working days ahead. You can buy or sell the security to take an entry. If you take entry by buying,
the market must go up and if you take entry by selling, the market must go down [20].

A long or short trade on an underlying instrument has the potential for unlimited profit, but also
carries the risk of unlimited losses because of it’s higher volatility. They leave the trader highly
exposed in the market [21].

22
 3.3.2 Spreads

An intra-instrument spread is long at one futures contract and short at another of the same
underlying with a different expiration date. An inter-instrument spread is long one instrument and
short a different instrument or futures contract. Both typically having the same expiration date.
Spreads can also be constructed with futures traded on two different exchanges (inter- exchange
spread).

While trading in a spread one may want the spread to widen or for the spread to narrow. With a
spread, you follow the relationship, or difference between two contracts, without having to pick a
single market direction. With a spread trade, you can make money whether the markets move
higher or lower in the other respective outrights. If the side of spread you bought goes up more than
the side of spread you sold, you make money. If the side of spread you bought does not move and
the side of spread you sold goes down, you make money. If the side you sold goes down more than
the side you bought, you again make money. Finally, if the side of spread you bought goes up
while the side of spread you sold goes down, you stand to profit even more. Of course, in the above
scenarios if the reverse of what is described happens, one would surely lose money. There is no
method of trading that is risk free. However, spreads add flexibility and versatility for the trader,
and generally with less risk involved. The key here is to find a spread that has a favorable
risk/reward dynamic which should be at least 2:1 in my opinion [22].

3.3.3 Butterfly spread

The Butterfly Spread will constitute of a near term bull spread and a longer term bear spread (or
vice versa if bearish). We will buy two different months, and then sell one month twice i.e. in the
ratio of 1:2:1 . The month we will sell twice is referred as the “whipping post” because we believe
it will underperform the other two months that we buy. This spread is very popular as it offers
cheaper margins rather than one directional outright trades. In my opinion, one may perceive this
strategy as less risky because you are long and short in the same commodity, just in distinct months.

In a market like soybean, this term structure will provide many opportunities to gain profit from
the changes in prices in different months, because of the fundamentals of the commodities

23
 markets and the fact that new supply will be on the market only a few times a year, the term
structure can change drastically depending on supply/demand and the contract movement[23].

3.4 STRATEGIES TO USE TO ANALYSE THE MARKETS

After gaining the knowledge about the Market fundamentals, most of the strategies used to analyze
are as follows:

(a) Price Action

(b) Charting Techniques

(c) Technical Indictors

(d) Geometrical Analysis

3.4.1 Price Action

Price action strategy is a technique by which a trader reads the market and then takes a decision
based on the actual price movement on the chart, as opposed to by relying on the various lagging
indicators present.

Price action traders believes that the trade should be made on the most important and up-to-date
relevant information, which they hold to be the current price and price history of a particular
instrument. Through the use of particular strategies, these traders can utilize the various past
informations to learn about what the prices are likely to do in short term, which gives them a leg
up when it comes to eking out the short-term profits.

More technically, price action is the movement of a instrument’s price. This action is encompassed
in technical and charting pattern techniques in an effort to find order in what might otherwise appear
to be a random price movement in the markets. Swings, tests of resistance, and consolidation are
all the examples of price action strategy [24].

24
One of the important aspects of trading with price action is to first learn how to identify a trending
market versus a very range-bound consolidated market. Trading with the trend is the best way to
trade and it is worthy one wants to stand a chance at making serious money as a trader.

The charts shown below tell how to use price dynamics to determine a markets trend. The market
is considered to be in an uptrend if it is making Higher Highs and Lower Lows (HH, LL) and a
downtrend is Lower Highs and Higher Lows (LH, HL).

Figure 3.13 shows the uptrend in the market and Figure 3.14 shows the consolidation prevailing
in the market.

Figure 3.10: Chart representing the upward trend in the market [25]

25
 Figure 3.11: Chart representing consolidation in the market [25]

3.5.1.1 Support and Resistance

Support and resistance is a trading concept that tells the movement of the price of a instrument will
tend to stop and reverse at certain predetermined market previous price levels. These levels are
denoted when there are more than one touches of price without getting through the level.

A support level is a level where the price of instrument tends to find support as it falls or it’s value
decreases. This means that the price is likely to "rebound" off this level rather than getting through
it, but once the price has breached this level, by a considerable amount exceeding some noise, it is
likely to continue falling until meeting some other support level in the market.

Figure 3.15 shows the resistance level which is the opposite of a support level. It is where the price
tends to find point of resistance as it rises. Again, this means that the price is more likely to "bounce"
off this level rather than break through it. However, once the price has breached this

26
level, by an amount exceeding some noise, it is likely to continue rising until meeting another
resistance level [26].

Figure 3.12: Support and Resistance levels observed in daily Brent Oil chart [27]

3.5.1.2 Breakout

A breakout happens when the instrument’s price that moves outside the defined support or resistance
level with an increased volume. A breakout trader take a long position after the stock price breaks
above resistance or get into a short position after the instrument goes below support. Once the
stock goes beyond the price barrier, volatility tends to increase and prices usually tend to go in the
breakout's direction. The reason why breakouts are such an important trading strategy is because
of these setups being the starting point for future volatility increments and large price swings. In
many circumstances, breakouts are the initial starting points for major price trends in the
markets[28].

27
Figure 3.13: Breakout observed in a Brent Oil futures Jan‟18 contract 1D chart at $58 level [27]

3.4.2 Charting Techniques

There are multiple candlestick patterns which can predict the next movement in the market and
specifically the emotions of individuals involved. Some of the major one’s are as follows:

3.5.2.1 Bullish or Bearish Engulfing pattern

The engulfing candlestick patterns, bullish or bearish are one of the easiest ways of candlestick
reversal patterns to identify, since these candlestick patterns are two-candlestick patterns, they are
more valid and are often looked upon as the possible reversal patterns in the markets.

Criteria for an Engulfing Pattern:

3.5.2.1.1 The market has to be in a clearly definable uptrend or downtrend.

3.5.2.1.2 The second real body must engulf the prior real body.

28
 3.5.2.1.3 The second real body of the engulfing pattern should be the opposite colour of
the prior real body.

Figure 3.14: Bearish engulfing candle observed in a Brent Oil outrights contract

3.5.2.2 Morning Star

The “morning star” is a 3-bar pattern in which the “star” is the smallest candle, typically opening
at the close of the previous candle or opening a gap below it, it indicates a transition from bearish
to bullish momentum.

29
 Figure 3.15: Morning star candle observed in an outrights chart [27]

3.5.2.3 Piercing Pattern

Piercing line is similar to dark cloud cover candlestick pattern but it occurs in a downtrending
market and it usually signifies a trend reversal. It is a two-candlestick pattern in which a strong
bearish candlestick is followed by a bullish candlestick whose open is below the low of the
previous candlestick and close well within the body of the bearish candlestick.

This pattern hints strongly of a trend reversal in the downtrending market because the open of the
bullish candlestick is below the low of the previous candlestick and still the sellers could not drive
the price downwards in a downtrending market. The stronger the penetration of the bullish

30
candlestick into the bearish candlestick the stronger is the indication. A 50 % penetration is
considered to be a good signal for trend reversal [29].

Figure 3.16: Piercing line pattern [30]

31
 Figure 3.17: Piercing line candle observed in a Brent chart [27]

3.5.2.4 Hanging Man

Aihanging manitype iofibearish ireversal ipattern, iis imade iup iof ijust ione icandle, ifound iin
ian iuptrend iof iprice icharts. iIt ihas ia ilong ilower iwick iand ia ishort ibody iat ithe itop iof ithe
icandlestick iwith ilittle ior ino iupper iwick. iIn iorder ifor ia icandle ito ibe ia ivalid ihanging
iman imost itraders isay ithe lower iwick imust ibe itwo itimes igreater ithan ithe isize iof ithe
ibody iportion iof ithe icandle, and ithe ibody iof ithe icandle imust ibe iat ithe iupper iend of ithe
itrading irange.

It iis icreated iwhen ithere iis ia isignificant isell-off inear ithe imarket iopen, ibut ibuyers iare iable
ito ipush ithis istock iback iup iso ithat iit icloses iat ior inear ithe iopening iprice. iGenerally, ithe
ilarge isell-off iis iseen ias ian iearly iindication ithat ithe ibulls i(buyers) iare ilosing icontrol iand
idemand ifor ithe iasset iis iwaning.

32
 Figure 3.18 : Hanging Man Candle [31]

3.5.2.5 Shooting Star

A shootingistariisiaitypeioficandlestick iformation that iresults iwhen ia isecurity's iprice, iat

isome ipoint during ithe iday, iadvances iwell iabove ithe iopening iprice ibut icloses ilower ithan
ithe iopeningiprice.

For ia icandlestick ito ibe iconsidered ia ishooting istar, ithe iformation imust ibe ion ian iupward
ior ibullish itrend, and ithe distance ibetween ithe ihighest iprice ifor ithe iday iand ithe iopening
iprice imust ibe imore ithan itwice ias ilarge ias ithe ishooting istar's ibody. iThe idistance ibetween
ithe ilowest price ifor ithe iday iand ithe iclosing iprice imust ibe ivery ismall ior inonexistent.
iShooting istars indicate ipotential iprice itops iand ireversals. The ishooting istar icandle iis imost
ieffective when iit iforms iafter ia iseries iof iat ileast three ior imore iconsecutive irising icandles
iwith ihigher ihighs. ias ithe iprice irises, ibuyers iget iimpatient iwaiting ifor ia ipull iback, iand
leapfrog iover ione ianother ito ipurchase ishares. iEventually, ithe ibuying ifrenzy ihits ia ipeak
as ithe ilast iof ithe iimmediate ibuyers ijump into ithe istock i(or iany ifinancial iinstrument) iin
ia igreed-driven ipanic ito imark ithe ihighest ihigh iof ithe ipreceding iseries iof icandles.

33
 Figure 3.19: Shooting star candle [32]

Figure 3.20: Shooting star formation and immediate downtrend [27]

34
 3.5.2.6 Harami Pattern

Thisipattern is aitwo-candlestick pattern iniwhichitheifirsticandlestickiverticallyiencompasses ithe

ione ithat ifollows iit.iThis isignal iis iinterpreted iin itwoiways:

1. An iindication ithat ian iincrease iin ivolatility iis iimminent. iThis iafford itraders ithe
iopportunity ito icreate itrades ithat ispeculate inot iso imuch ion idirection, ibut irather ion
ian iincrease iin ivolatility on a breakout iin iany ispecific idirection.

2. In ithe icontextiofiaitrend, ia iharami/inside ibar ican ibe iindicative iof iexhaustion iand
ithe ionset iof ia ireversal.iIn ithis imanner, iit iis isimilar itoilong iwick ipatterns iand ievening
istar/morning istar patterns iexamined iearlier iin ithisiguide.

Figure 3.21: Bullish Harami observed in a 15 min Brent outrights chart [27]

3.5 TECHNICAL ANALYSIS

Technical Analysis is a way of predicting the future financial price trends based on an analysis of
past price movements. Like weather forecasting, technical analysis does not always result in
absolutely correct predictions about the future. Instead, technical analysis can help individuals

35
anticipate what is likely to happen to the prices over time. Technical analysis uses a wide variety
of charts that show price over a period of time [33].

Technical analysis is applicable to almost everywhere in financial markets i.e. stocks, indices,
commodities, futures or any tradable instrument where the price is influenced by the forces of
supply and demand. The timeframe can be set as per the user’s convinience based on intraday (1-
minute, 5-minutes, 10-minutes, 15-minutes, 30-minutes or hourly), daily, weekly or monthly price
data and last a few hours or many years.

Key assumptions in a technical analysis are:

 High Liquidity – Liquidity essentially means volume in the markets. Heavily-traded stocks
allow individuals to trade quickly and easily, without dramatically changing the price of
the stock in a short time. Thinly- traded stocks are more difficult to trade, because there
aren't many buyers or sellers at any given time period, so buyers and sellers may have to
change their desired price considerably in order to make a trade deal and reach a self agreed
price. In addition, low liquidity stocks are often very less priced (sometimes less than a
penny per share and maybe even negetive in case of spreads), which means that their prices
can be more easily manipulated by individual traders. These outside forces acting on less
volatile instruments make them unsuitable for technical analysis.

 Splits, dividends, and distributions are the most common “culprits” for artificial price
changes. Though there is no distinction in the value of the investment made, artificial price
variations can dramatically affect the price chart and make technical analysis tools difficult
to be used. This kind of price influence from external sources can easily be taken care of
by adjusting the historical data prior to the price change.

 Technical analysis cannot predict adverse events, including the business events of the
company or a company's CEO dying unexpectedly, political events or a terrorist act. When
these external forces are influencing the price, technicians have to wait patiently until the
chart settles down and starts to reflect the new normal that results from such events.

36
 Technical Indicators helps in predicting the future prices of instruments. Some of them are
discussed below:

Moving Averages

Chart patterns can be difficult to read given their volatility due to extreme price movements.
Moving averages can help in smoothing out these erratic movements in the market by removing
day-to-day fluctuations and make trends easier to spot and take decisions accordingly. Since they
take the average of previous price movements, moving averages are better for precise reading of
the past price movements rather than irrationaly predicting future past movements. There are two
different types of moving averages which are as follows:

 Simple Moving Average

The most common type of moving average is the simple moving average(SMA), which simply
takes the sum of all of the previously closed prices over a time frame and divides the result by
the total number of prices used in it’s calculation. For example, a 10-day simple moving
average(SMA) takes the last ten closing prices and divides them by ten.

Figure 3.22: Simple moving average applied on a daily chart on S&P 500 [34]

37
 Figure 3.25 shows a chart of a instrument with both a 50-day and 200-day moving average. The
50-day moving average(MA) is more responsive to the price changes than the 200-day moving
so they are also classified as Fast and Slow Moving averages. In general, individuals can
increase the responsiveness of a moving average by decreasing the time period and smoothen
out movements by increasing the time period.

Critiques of the simple moving average(SMA) see limited value since each point in the data
series might have the same impact on the result regardless of its occurence in the sequence. For
example, a price jump 199 days ago has the same value as that of the variation happening 1 day
ago on a 200 day SMA. These criticisms pushed traders to use other types of moving
averages(MA) designed to solve these problems and create a more accurate model.

 Exponential Moving Average

Exponential moving averages(EMA) has less lag than the Simple Moving average and are
therefore more sensitive to recent prices - and recent price changes as they carry a higher
weightage. Exponential moving averages(EMA) will turn before SMA. Simple moving
averages, on the other hand, represent a true average of prices for the complete time period. As
such, simple moving averages may be better suited to identify support or resistance levels
formed over a period of time.

Moving average preference depends onto the objectives, analytical style, and the preffered time
horizon. Analysts should experiment with both the types of moving averages as well as different
timeframes to find their appropriate fit. The chart given below shows stock of IBM with a 50-
day SMA in red colour and the 50-day EMA in green colour. Both peaked late in the January,
but the decline in the EMA was much more sharper than the decline in the SMA. The EMA
turned up in the mid-February, but the SMA continued to stay lower until the end of March.
Notice that the SMA turned up over a month after the EMA turned up.

38
 Figure 3.23: EMA on a IBM chart [34]

Moving averages can also be used to identify trend reversals in the markets several ways:

 Price Crossover. The price icrossing over ithe moving average ican be a powerful sign of
a trend ireversal, while ithe price crossing above the imoving average indicates a ibullish
breakout ahead. Often, traders iwill use a long-term moving average ito measure these
crossovers since the price ifrequently interacts iwith shorter-term moving averages, which
creates too imuch noise for ipractical use [35].

 MA Crossover. Short-term imoving averages crossing ibelow long-term moving averages

is often the isign of a bearish reversal, iwhile a short-term moving iaverage crossover above
a ilong-term moving average could iprecede a breakout higher. Longer distances between
the imoving averages suggest longer term ireversals as well. For instance, a 50-day moving
iaverage crossover above a i200-day moving average is a istronger signal than a 10-day
moving average icrossover above a 20-day imoving average.

39
 Figure 3.24: Crossovers observed on a S&P chart [34]

And finally, moving iaverages can alsoibe used to identify areas of isupport and resistance. Longer
term moving iaverages, such as the 200 DMA, are closely looked upon as iareas of support and
resistance ifor stocks. A move through a imajor moving average is often used as a sign from
technical itraders that a trend is ireversing.

RSI indicator

The relative istrength index (RSI) is a momentum indicator developed iby noted technical analyst
Welles iWilder, that compares the magnitude of recent gains and ilosses over a specified time
period to imeasure speed of price changes of a isecurity. It is primarily used to attempt to identify
ioverbought or oversold iconditions in the trading of an asset [36].

The relative strength index is icalculated using the following formula:

RSI = 100 - 100 / (1 + RS)

Where RS = Average gain of up iperiods during the specified time frame / Average loss of down
periods during the ispecified time frame.

40
The RSI iprovides a relative evaluation of the strength of a isecurity's recent price iperformance,
thus making it a imomentum indicator. iRSI values range ifrom 0 to 100. The idefault time frame
for icomparing up periods to down iperiods is 14, as in 14 itrading days.

Traditional iinterpretation and usage iof the RSI is that RSI values of 70 or iabove indicate that a
security is becoming overbought ior overvalued, and itherefore may be primed for a trend reversal
or icorrective pullback in price. On the other side of RSI values, an RSI reading of 30 or below is
commonly iinterpreted as iindicating an oversold or iundervalued condition that may signal a trend
change or icorrective price reversal to the upside.

Sudden large price changes can create false buy or sell signals on the RSI indicator. It is thus
advised, best used with refinements to its conditions or together with other, confirming technical
indicators.

Some traders, in the process of avoiding false signals from the RSI indicator, use more extreme
RSI values as buy or sell signals, for e.g. RSI readings over 80 to indicate overbought conditions
and RSI readings under 20 to indicate oversold conditions.

Figure 3.25: RSI indicator showing overbought and oversold conditions in the market [36]

41
 Bollinger Bands

It is an excellent range-bound indicator that measures standard deviation from the moving average.

It was developed by Mr. John Bollinger, Bollinger Bands have three lines: · A moving
average(MA) line, an upper band two std. deviations above the moving average and a lower band
two std. deviations below the moving average, these are an excellent range-bound indicators used
in the market – meaning they work best when the markets are not strongly trending, but rather
fluctuating between a support and a resistance. Bollinger bands operate under the condition that a
instrument’s pair price is most likely to go towards its average, and thus when it strays too far – i.e.
two std. deviations away – it is due to retrace it’s path back to it’s moving average. Parameters:
Std. deviation of 2; moving average of 20.

First calculate the Middle iBand, then calculate the Upper iand Lower Bands.

1. Middle iBand = 20-day simple imoving average (SMA)

2. Upper Band = 20-day SMA + (20-day istandard deviation of price x 2)
3. Lower Band = 20-day SMA – (20-day standard ideviation of price x 2)

How it can be used: In range-bound markets i.e. markets oscilating b/w a support and a resistance,
trading with Bollinger Bands is fairly simple and easy: it essentially involves selling at the top
band and buying at the bottom of the band, the bands are almost horizontal when the market is in
an established range. This is where the reversals at the bands are more effective.

42
Figure 3.26: Bollinger bands predicting the next move

43
3.6 GEOMETRICAL ANALYSIS

Figure 3.27: Double bottom observed in a Brent Oil 15 min chart [27]

44
 Figure 3.28: Double Top observed in a Brent 1 min chart [27]

Head and Shoulder Pattern

Head and shoulders also called H&S is a reversal pattern that when formed, signals the security is
likely to move against it’s previous trends. There are two versions of the head-and-shoulders
pattern. The head- and-shoulder’s top is a signal that a instrument’s price is set to fall, once the
pattern is complete, and is usually formed at the peak of an upward trend. The other version,

45
of the head-and-shoulder’s bottom (also called as inverse head and shoulders), signals that a
security's price is set to rise and usually forms during a downward trend in the market[38].

Figure 3.29: Schematic of a Head and Shoulder pattern [39]

46
 Fibonacci Retracement

A Fibonacci retracement is a technical analysis tool that refers to areas of support and resistance.
Fibonacci retracement levels use horizontal lines to indicate key areas of support and resistance at
the key Fibonacci levels before the trend continues in the originally predicted direction. These
levels are created by drawing a trendline between the highs and lows and then dividing the vertical
distance by the key Fibonacci ratios of 23.6%., 38.2%, 50%, 61.8% and 100% [40].

Figure 3.30: Fibonacci Retracement levels in the market

47
 CHAPTER 4
RESULTS AND DISCUSSIONS

Based on the discussed strategies I analysed the instruments which were not fixed because of the
high volatility in the market. Some of them which I analysed are as follows:

(a) Outrights contract: Mar 20, May 20, Jul 20, Oct 20.

(b) Spreads:`

 Mar 20- May 20

 May 20- Jul 20

 Jul 20- Oct 20

 Oct 20- Mar 21

(c) Fly Spread

 Mar20-May20-Jul20

4.1 PROPOSED MODEL

The proposed theory isolated the volume being traded within each candlestick. (Candlesticks being formed at
different time intervals, the theory has used 1 min candlesticks for the same).The decision to use volume as the
intrinsic property was based on high correlation factor observed between the volume traded and the movement
observed in the price of the contract. This volume is further segregated into the bid volume (number of sellers)
and the ask volume (number of buyers). The proposed theory intends to measure the momentum of the market
using the relative change between the volumes mentioned above. The change in the momentum will be indicative
of changing market trends which will be used to generate buy and sell signals.

4.2 DEVELOPING CIRCUITS FOR ALGORITHM

Using company tools and software, a flow diagram was developed to implement the developed logic and then
to deploy the aspects via circuit design. The various blocks developed were optimized in accordance with the
needs of the algorithm. The developed algorithm circuit was then integrated with the company platform for
48
 testing and execution.

Figure 4.1 SAMPLE AUTOMATIC ALGORITHM

Autospreader Spreads:-
 Made synthetic spreads to take advantafe of old crop and the new crop marketing season.
 Used the curve to understand the nature and future price movements.

Figure 4.2 Autospreader Front-end

49
4.3 TOOLS USED

The most fundamental part for any market study is to have a proper knowledge of Technical Indicators which help us
to look at market charts and analyze the pattern and trend in which the market is moving.
Technical Indicators are the basic part of the technical analysis and are plotted as a chart pattern to predict the
market’s movement

4.3.1 Support and Resistance Indicators

In market study Support and Resistance is a concept that the price of a commodity will tend to stop and
reverse at certain predicted price levels which are calculated using the past data of the same commodity that
follows a general trend. These levels are denoted by multiple touches of price without any breakthrough of
that level.
4.3.1.1 Bollinger Bands
This tool responds to short term volatility and direction of the price of the market. This tool also gives the
signal when price movement exceeds the historical boundaries. It is the most commonly used Support and
Resistance tool used by market analysts to study the price action of the market.

Figure 4.3: Bollinger Bands

4.3.1.2 Moving Averages

Moving Averages are the most common type of technical indicators .Moving averages are basically the
averages of last n terms where oldest value gets interchanged with the newest.Two basic types of Moving
Averages are used in common.

4.3.1.3 Simple Moving Average

A Simple Moving Average (SMA) is associate degree arithmetic moving average that is calculated by adding

50
the damage of a goods for the amount of your time periods so dividing it by the amount of your time periods.
Here the amount of periods is user outlined per their desires.

Figure 4.4: SMA of 200 Periods

4.3.1.4 Exponential Moving Average

An Exponential Moving Average (EMA) is a type of moving average which is similar to SMA, the only
difference is that more weightage is given to the latest prices of the market. This type of moving average
reacts faster to the recent price fluctuation in the live market and it works better than the SMA.

Figure 4.5: EMA of different periods

51
 Figure 4.6: Comparison between EMA and SMA

4.3.2 Momentum Indicators

These types of indicators help the market analysts to identify the rate of acceleration of a commodity’s price or
volume. In technical analysis, momentum is like an oscillator and is used to identify trend lines or support and
resistance lines.
4.3.2.1 Volume Weighted Average Price (VWAP)
This indicator helps the market analysts to judge the market price with respect to the volume of contracts
bought or sold at a particular price. VWAP is calculated by adding up the number of contracts bought of
a commodity multiplied by the commodity price and then dividing it by the total number of commodities
bought.

VWAP Formula

52
4.3.2.2 Average True Range (ATR)

This indicator fluctuates its value whenever there is volatility in the market. Meaning, the indicator does not
provide an indication for the price trend, but it gives us simply the degree of price volatility. It can be used
by the analysts to take signals for their entry into the market or for their exit from the markets. The numeric
value of the ATR when added or subtracted from the close price of candle can give the analysts their stop
loss or stop target limit.

Figure 4.7: Formula for calculation of 14-period ATR

53
 CHAPTER 5
CONCLUSION & FUTURE SCOPE

The internship at Futures First was a great opportunity to dwelve into the world of Global Financial Markets
the kind of Impact markets have nowadays in an advanced economy is huge and thus it’s important to
understand them, it’s a place where a lot of individuals from all around the globe are involved which brings in
a huge amout of different Human Psychology, even though it has huge scale in terms of Capital involved as
well as the number of people it still behaves in a designated manner most of the times it is because most of the
people look at the same set of things to take a decision. I got the basic experience of point and click trading
ehich is atraditional method used for Markets in India along with it exposure to highly advanced automated
trading was also provided.

The learning curve is imperitive in this profession as it takes time to get in sync with the markets and develop a
high level of professional discipline to sustain longer in it. Analyzing the markets to extract maximum profits
is the most important part, instead of waiting to capture Long Term trends traders mostly seek to get out of
their positions in a short span of time with taking advantage of market fluctuations in their own favour. As a
Market Analyst one can be his own boss, schedule his/her work timing according to their ease and can have an
opportunity of unlimited earning potentential.

Since the Financial Markets are still an evolving story the scope of future work is immense, everyday hundreds
of data points are created and hence thousands of analytical conclusions can be generated. Algorithmic Trading
is still a much unexplored domain and there is a lot of scope for innovation in it.

54
 REFERENCES

[1] http://www.futuresfirst.com/WhyFuturesFirst/Index

[2] https://www.investopedia.com/walkthrough/corporate-finance/1/financial-markets.aspx
[3] https://en.wikipedia.org/wiki/Financial_market
[4] https://www.investopedia.com/walkthrough/corporate-finance/1/financial- markets.aspx
[5] https://en.wikipedia.org/wiki/Capital_market
[6] https://www.investopedia.com/terms/e/equitymarket.asp
[7] https://www.investopedia.com/terms/s/stockmarket.asp
[8] https://www.investopedia.com/terms/d/derivative.asp
[9] Futures First Proprietary Database
[10] https://www.eia.gov/todayinenergy/detail.php?id=12751
[11] https://www.investopedia.com/terms/t/trade.asp
[12] https://en.wikipedia.org/wiki/Electronic_trading
[13] https://www.investopedia.com/university/how-start-trading/how-start-trading-trading-
business.asp
[14] https://www.investopedia.com/university/how-start-trading/how-start-trading-trading-
styles.asp
[15] http://www.moneycontrol.com/india/newsarticle/news_print.php?autono=706200&sr_no
=0
[16] www.aws.investopedia.com/university/margin
[17] https://simplehai.axisdirect.in/learn/overview/117-good-reads-ri/4284-hedging-
speculating-in-derivatives-market-axisdirect?tagArticle=yes&tagsCount=7
[18] Stellar Front End User Guide
[19] https://www.investopedia.com/university/how-start-trading/how-start-trading-order-
types.asp

55
[20] http://www.futuresmag.com/2014/01/06/what-are-spreads-all-about

[21] https://www.investopedia.com/terms/o/outrightfuturesposition.asp

[22] http://www.futuresmag.com/2014/01/06/what-are-spreads-all-about

[23] https://www.danielstrading.com/strategies/2012/04/14/futures-spread-techniques-
butterfly-futures-spread (accessed 3 January 2018)

[24] https://www.investopedia.com/university/introduction-stock-trader-types/price-action-
traders.asp (accessed 4 January 2018)
[25] http://www.learntotradethemarket.com/price-action-trading-forex (accessed 4 January
2018)

[26] https://en.wikipedia.org/wiki/Support_and_resistance

[27] https://www.investing.com/commodities/brent-oil-streaming-chart
[28] https://www.investopedia.com/articles/trading/08/trading-breakouts.asp#ixzz530thf3tT

[29] https://www.investopedia.com/terms/piercing-pattern.asp

[30] http://tutorials.topstockresearch.com/candlestick/Bullish/BullishPiercing/TutotrialOnBull
ishPiercingChartPattern.html
[31] https://forextradingstrategies4u.com/wp-content/uploads/2016/01/Hanging-Man-
Candlestick-Pattern.png
[32] https://fxstreet.com/rates-charts/chart/candlestick-patterns
[33] http://stockcharts.com/school/doku.php?id=chart_school:overview:technical_analysis
[34] http://stockcharts.com/school/doku.php?id=chart_school:technical_indicators:moving_ av
erages
[35] https://www.investopedia.com/university/technical/techanalysis9.asp#ixzz532b7uShD
[36] https://www.investopedia.com/terms/r/rsi.asp#ixzz53817SQzN

56
[37] https://www.investopedia.com/university/charts/charts4.asp#ixzz53KH1C4o3
[38] https://www.investopedia.com/university/charts/charts2.asp#ixzz53KPk6vz4
[39] https://www.investopedia.com/terms/h/head-shoulders.asp
[40] https://www.investopedia.com/terms/f/fibonacciretracement.asp#ixzz53KRnoImZ

57
 Appendix-A

Quant Research

SoyBean, SoyOil, SoyMeal Futures

58
58
 Product-Soya Oil
Daily Ranges

59
59
Monthly Average Daily Ranges

Understandings:
● The range for which the soyabean oil varies is from 0.3 -1.6.
● Monthly average Daily range for the month of march and
November is the highest in case of all the three contracts.
● There is a significant dip in the case of May and September

60
60
 Product-Soyameal Complex
Daily Ranges

61
61
Monthly Average Daily Range

Understandings:

● The range for which the soyabean Complex varies is from 3

-10. Monthly average Daily range for the month of march
and
● November is the highest in case of all the three contracts just

62
62
like in the case of Oil.

63
63
C1-C2, C2-C3 and their daily and average daily ranges

Product BO-Soya Oil

Daily Ranges: Calendar Spread

64
64
Monthly Average Daily Range

Understanding:
​ The Range for which the Spread C1-C2 in case of Oil, works between
0.02 -0.2.
​ When compared to a outright the spread, i.e C1-C2 and C2-C3 show less
movement and can be used to hedge the risk .
​ The movement in both the spreads is similar except for September where
the spread c1-c2 moves with twice the volatility with which the spread
c2-c3 moves.

65
65
66
66
Monthly Average Daily Range

Understanding:
​ The Range for which the Spread C1-C2 in case of Oil, works between
0.75-5.
​ When compared to an outright of the complex, the spread, i.e C1-C2
and C2-C3 show less movement and can be used to hedge the risk .
​ The movement in both the spreads is similar except for the month of
September, it can be seen that spread c1-c2 mimics the range
movement of the spread c2-c3 with a little less volatility.

67
67
 PRODUCT-Soyameal complex
Daily Ranges

68
68
Monthly Average Daily Range

Understanding:
​ The Range for which the Spread C1-C2 in case of Oil, works between
0.75-5.
​ When compared to a outright of the complex, the spread, i.e C1-C2 and
C2-C3 show less movement and can be used to hedge the risk .
​ The movement in both the spreads is similar except for the month of
september, it can be seen that spread c1-c2 mimics the range movement
of the spread c2-c3 with a little less volatility.

69
69
70
70
 PRODUCT SM-SOYAMEAL complex
Daily Ranges

71
71
Correlation Matrix

Soyaoil
1BOc1 1BOc2 1BOc3 1BOc1-1BOc2 1BOc2-1BOc
3
1BOc1 1
1BOc2 0.756993 1
1BOc3 0.824909 0.875932 1
1BOc1-1BOc2 0.226733 0.707125 0.561583608 1
1BOc2-1BOc3 0.440834 0.793198 0.65261118 0.922016295 1

Understanding:

​ There is a high correlation between contract 3 and contract 2, which helps

us understand that we can take positions in a way which can maximize our
profits.
​ Similarly, in case of spreads for c2,c3 and fly for c1,c2 there is a correlation
of about 92% and we can use that to our advantage.

Soyabean
Sc Sc SC Sc1-sc2 Sc2-Sc3
1 2 3
Sc1 1
Sc2 0.939306 1
SC3 0.957313 0.942046 1
Sc1-sc2 0.347315 0.521321 0.433097 1
Sc2-Sc3 0.678089 0.676376 0.602008 0.695907 1

Understanding:

​ There is a very high correlation between c1 and c3, close to 95 percent.

This can be used to take position in a strategic manner.
​ In case of spreads with outrights or spreads with spreads there isn’t much
correlation where we can take advantage.

Soyameal
SMC1 SMC2 SMC SMC1-SMC2 SMC3-
3 SMC3
SMC1 1
SMC2 0.955353 1
SMC3 0.9224 0.99066 1
SMC1- 0.812051 0.720757 0.67495051 1
SMC2
SMC3- 0.933863 0.853375 0.79567103 0.789430923 1
SMC3

72
72
Understandings:
● There is a very high correlation between c2 and c3, about 99 percent, which
means that these outrights can be traded in a similar manner.

73
73
Monthly Volume analysis

Soyaoil:

74
74
SoyBean

75
75
Soyameal

76
76
Monthly Correlation between volume and ranges
Range Vs Volume Correlation

BOc1 0.437077

BOc2 0.554192

BOc3 0.638892

BO(c1-c2) -0.43186

BO(c2-c3) 0.42796

Sc1 0.655764

Sc2 0.717234105

Sc3 0.033154

S(c1-c2) -0.52915

S(c2-c3) 0.365706

SMc1 0.056367

SMc2 0.320913

SMc3 0.52451

SM(c1-c2) -0.14249

SM(c2-c3) 0.292694

77
77
Monthly Price Movements and Patterns

78
78
79
79
80
80
 Seasonal Impact on SoyaBeans
SoyaBean(March)

SoyaBean(April)

81
81
 Seasonal Impact on SoyaOil
Soyaoil(May)

Soyaoil(April)

82
82
Seasonal Impact on SoyaMeal

SoyaMeal(March)

SoyaMeal(April)

83
83
 Reports and their Impact on the Market
SoyaBean

SoyaOil

SoyaMeal

84
84
 Relation Between Time and Volume Traded

SoyaBean

9511 8730
8

3297
885 8 0 179
346 617 514 0
441 7

SoyaMeal

11436

7821
80
5529

14 0 2074 1184
134 293 317 394 904
272 8

85
85
SoyaOil

8 50
6512 5959

2076
309 1159 812 1 513 721
58
321
252

86
86
Volume Analysis at the Beginning and End of a Contract
SoyaBean

Learnings:

​ The volume with which a commodity is traded varies significantly with when a contract
begins or ends, in this case the volume drops down till 15th July when the contract ends and a
new contract is traded with higher interest. Similar things happen for an August Contract.
​ This shows how market participation takes place when a previous contract ends or a new
contract begins.

87
87
 Understanding Price Action
Soya Oil

Open High- End Low

Learnings:

​ When the price opens high on a particular day and ends on a low, it just doesn’t move towards
the low in a straight line, the price rejects and consolidates to move towards a low.
​ The movement is not unidirectional, the understanding of price movements is imperative to
place the right trade.

Open Low- End High

Learnings:

​ When the price opens low on a particular day and ends on a high, it just doesn’t move towards
the high in a straight line, the price rejects and then consolidates and move towards a high.
​ The movement is not unidirectional, the understanding of price movements is imperative to
place the right trade.

88
88
Plagiarism check for project report..
ORIGINALITY REPORT

11 %
SIMILARITY INDEX
9%
INTERNET SOURCES
2%
PUBLICATIONS
8%
STUDENT PAPERS

PRIMARY SOURCES

1
www.coursehero.com
Internet Source 1%
2
www.investopedia.com
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3
business.sherbrookerecord.com
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4
pezzottaitejournals.net
Internet Source 1%
5
Submitted to Thapar University, Patiala
Student Paper 1%
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7
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voperloads.ga
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