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Advanced Valuation Analysis Tools and Simulation
Brian Stonerock
CGU EMP Independent Study
December Update
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Overview
Objective: Evaluate advanced investing and valuation concepts for investments through the development of robust cutting edge platform using the latest technologies
December Update Project Plan and Progress Technical Analysis Technology / Data Sources Demo Next Steps
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Project Plan
Research and Plan Develop Framework – Vaadin / Java Implement Simple Tools Implement Stock and Technical Analysis
Connect to Historical Servers Implement Analysis Tools
Data Mining (IP) Back Casting (IP) Bubble Bursting Documentation and Deployment
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The Potential Rewards
How can market timing can benefit returns? The only problem is that you have to be very good at it….
Alternative Market Strategies (1964 to 1984)Strategy Avg. Annual Gain $10,000 Grows ToBuy and Hold 11.46% 87,500$ Avoid Bear Markets 21.48% 489,700$ Long and Short Major Swings 27.99% 1,391,200$ Long and Short Every 5% Swing 93.18% 5,240,000,000$
Based on work from Norman Fosbeck 1984
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The Potential Rewards (Cont)
The benefit of being smart enough to miss the worst 5 days of the year between Feb ‘66 and Oct ‘01
Source: “The Truth About Timing,” by Jacqueline Doherty, Barron’s (November 5, 2001)
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Technical Analysis
Technical analysis: The attempt to forecast stock prices on the basis of market-derived data
Technicians (also known as quantitative analysts or chartists) usually look at price, volume and psychological indicators over time
Basic Tools Trend Lines Moving Averages Price Patterns Indicators Cycles
Support Resistance
Breakout
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Technical Indicators
There are, literally, hundreds of technical indicators used to generate buy and sell signals
We will look at just a few that I use: SMA – Simple Moving Average EMA – Exponential Moving Average RSI - Relative Strength Index (by Welles Wilder)
0 to 100 measurement the speed and change of price movements, >70 overbought and <30 oversold
MFI - Money Flow Index Similar to RSI but volume weighted
CCI - Commodity Channel Index Identifies cyclical turns in commodities seeking overbought
and oversold conditions
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Technology Overview
VaadinJava / TomcatJFreeChartData Sources
JStock Interactive Brokers
Trader Work Station JBookTrader
http://code.google.com/p/cgu-emp
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Technology Overview
Vaadin Architecture http://vaadin.com
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Technology Overview
Development Process
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Technology Overview: Eclipse
Dynamic Web Project
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Data Sources
Real Time & Historical Data Servers Interactive Brokers Yahoo EOD, ID for various all countries Google EOD
Tickers, Quotes, and more
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Demo
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Next Steps: Emotionless Trading
Back Casting JStockTrader Demo
Bollinger Bands Example
Source: Stock Market Prediction Using Online Data:Fundamental and Technical Approaches By Nikhil Bakshi (2008)
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Next Steps (Cont): Predicting Bubbles
Ideal Type 3: Irrational institutions Bubble Principal-agent problem, where
Speculators have incentives to pay higher prices than what is supported by historical patterns or strong evidence
Source: Price Bubbles on the Housing Market: Concept, theory and indicators Hans Lind (2008)
Ideal Type 1: Pure Speculative Bubble Asset price today is too high and the price eventually will fall…. Speculators believe that the
price will continue to rise for some time, with potential to sell with a profit before the price falls
Ideal Type 2:Irrational Expectations Bubble Speculators become overoptimistic and think the price will continue to grow rapidly. The
growth is expected to outperform history or fundamentals…. Therefore it seems rational to pay a high price
"the basic intuition is straightforward: if the reason that the price is high today is only because investors believe that the selling price will be high tomorrow-when "fundamental" factors do not seem to justify such a price-then a bubble exists." (Stiglitz 1990, p 13)
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Next Steps (Cont)
Bubble Equation9 Parameter equation that requires iterative “fitting” algorithm to predict falls
http://frog-numerics.com/blog/2009-12_blog.html
Source: D. Sornette and A. Johansen ('Large Financial Crashes', Physica A 245,pp. 411-422, 1997)