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Table of Contents

Stock Exchange Parameters ............................................................................................................. 1

Fundamental Stock Analysis ................................................................................................... 3

Stock Fundamental Analysis (Value, Growth, Income, GARP, Quality) .................. 3

Quantitative Stock Fundamental Analysis – Buying Based on Numbers .................................. 5

Arguments Against Quantitative Fundamental Stock Analysis ................................................ 6

Technical Stock Analysis .................................................................................................................... 7

Moving average .................................................................................................................................. 8

MACD .................................................................................................................................................. 3

Stochastic ............................................................................................................................................ 10

RSI ....................................................................................................................................................... 11

Average Directional Index (ADX) ................................................................................................. 11

Conclusion ............................................................................................................................................. 12

References .............................................................................................................................................. 13

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Stock Exchange Parameters

When you're ready to develop a trading strategy, an easy way to get started is to set

specific stock trading parameters to use when scanning for potential stock trading

candidates. Here are some questions to help you think about the basic parameters you

want to use for any potential stock pick:

What is the minimum number of company shares traded daily (volume)?

What is the minimum or maximum stock price? Are you willing to trade

penny stocks (stocks under $10)? How about stocks over $100?

Which exchanges will you trade? U.S? Canadian? Other?

If you are using fundamentals, which are the most important?

Are there industry groups you want to focus on?

Are there a few familiar stocks that you want to stick to trading?

Volume: Setting the number of shares traded daily (volume) is a good thing. Set a

parameter for volume for at least over 100,000 shares traded daily. The reason is you

don’t want to get into stocks that are too thinly traded because there’s a chance that

things could get dicey if you want to get out of a position and there are more sellers than

buyers. So just steering clear and avoiding thinly traded stocks is a good thing, and there

will still be plenty of choices.

Price: There are two things to think about when you set price parameters – the length of

time you intend to hold stocks and how comfortable you are with increased volatility.

The reason is that typically lower priced stocks have a broader daily price range than

higher priced stocks. A longer-term stock trader might get kicked out of a penny stock

before a profit can be made. Stocks priced over $10-$15 are often times more stable.

Exchanges: There are numerous exchanges you can trade on from around the world.

You should decide on which exchanges you feel comfortable trading and add those

exchanges to your parameter criteria. You could stick to U.S. stock exchanges or if

you’re a night owl and are comfortable with exchanges from other countries you can

trade at night.

Fundamentals: You can also set stock trading parameters with fundamentals by

screening for earnings, return on investment (ROI), price-to-earnings ratio (P/E) or any

other fundamentals that you like. A fundamental scan will likely turn out less trading

choices than some of the more basic parameter or probability scans depending on how

tight your fundamental parameters are set. However, if fundamentals are important to

you, then choosing trading candidates from the cream of the crop of good,

fundamentally sound stocks will work in your favor.

Industry Groups: For some traders, sticking with active or seasonal industry groups is

another way to go. By choosing high-ranking industry groups as a stock trading

parameter, in theory, you will weed out the less successful and inefficient stocks and

focus on the more popular ones that are also the focus of other traders.

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Another strategy that falls into a set parameter is to choose a group of stocks that you

like and put them into a ―stable‖ from which to trade. For example, that is what is done

in a rolling stocks strategy.

If you want to bring back a shorter list of trading candidates you can also incorporate

higher than usual trading volume, 52-week highs in your scan criteria or any other

parameters that you think will be successful.

Stock trading parameters are just a part of stock trading strategies and a complete stock

trading plan.

After the general parameters have been set, a second round of criteria needs to be

identified. This next group of criteria is based on probabilities that a stock will do

something.

Fundamental Stock Analysis

Fundamental Stock Analysis is typically more closely tied to buy and hold investors,

whereby day traders use solely technical analysis and most swing traders use both

fundamental and technical stock analysis. Technical analysis is specifically important for

swing traders with a very short time horizon (that is, a couple of days or just a few

weeks). Most swing trading software uses only technical analysis but the Stock nod

neural network uses a blended custom recipe of both technician’s and fundamentals.

Stock fundamental analysis can answer questions that are beyond the scope of technical

analysis, such as ―Why is this security price moving?‖

Stock Fundamental Analysis (Value, Growth, Income, GARP, Quality)

Many people rightly believe that when you buy a share of stock you are buying a

proportional share in a business. As a consequence, to figure out how much the stock is

worth, you should determine how much the business is worth. Investors generally do

this by assessing the company’s financials in terms of per-share values in order to

calculate how much the proportional share of the business is worth. This is known as

―fundamental‖ analysis by some, and most who use it view it as the only kind of rational

stock analysis.

Although analyzing a business might seem like a straightforward activity, there are many

flavors of fundamental analysis. Investors often create oppositions and subcategories in

order to better understand their specific investing philosophy. In the end, most investors

come up with an approach that is a blend of a number of different approaches. Many of

the distinctions are more academic inventions than actual practical differences. For

instance, value and growth have been codified by economists who study the stock

market even though market practitioners do not find these labels to be quite as useful.

In the following descriptions, we will focus on what most investors mean when they use

these labels, although you always have to be careful to double-check what someone

using them really means.

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Value: A cynic, as the saying goes, is someone who knows the price of everything and

the value of nothing. An investor’s purpose, though, should be to know both the price

and the value of a company’s stock. The goal of the value investor is to purchase

companies at a large discount to their intrinsic value – what the business would be worth

if it were sold tomorrow. In a sense, all investors are ―value‖ investors – they want to buy

a stock that is worth more than what they paid. Typically those who describe themselves

as value investors are focused on the liquidation value of a company, or what it might be

worth if all of its assets were sold tomorrow. However, value can be a very confusing

label as the idea of intrinsic value is not specifically limited to the notion of liquidation

value. Novices should understand that although most value investors believe in certain

things, not all who use the word ―value‖ mean the same thing.

The person viewed as providing the foundation for modern value investing is Benjamin

Graham, whose 1934 book Security Analysis (co-written with David Dodd) is still widely

used today. Other investors viewed as serious practitioners of the value approach

include Sir John Templeton and Michael Price. These value investors tend to have very

strict, absolute rules governing how they purchase a company’s stock. These rules are

usually based on relationships between the current market price of the company and

certain business fundamentals. A few examples include:

Price/earnings ratios (P/E)

Dividend yields above a certain absolute limit

Book value per share relative to the share price

Total sales at a certain level relative to the company’s market capitalization of

market value

Growth: Growth investing is the idea that you should buy stock in companies whose

potential for growth in sales and earnings is excellent. Growth investors tend to focus

more on the company’s value as an ongoing concern. Many plan to hold these stocks

for long periods of time, although this is not always the case. At a certain point, ―growth‖

as a label is as dysfunctional as ―value,‖ given that very few people want to buy

companies that are not growing.

Growth investors look at the underlying quality of the business and the rate at which it is

growing in order to analyze whether to buy it. Excited by new companies, new

industries, and new markets, growth investors normally buy companies that they believe

are capable of increasing sales, earnings, and other important business metrics by a

minimum amount each year. Growth is often discussed in opposition to value, but

sometimes the lines between the two approaches become quite fuzzy in practice.

Income: Although today common stocks are widely purchased by people who expect

the shares to increase in value, there are still many people who buy stocks primarily

because of the stream of dividends they generate. Called income investors, these

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individuals often entirely forego companies whose shares have the possibility of capital

appreciation for high-yielding dividend-paying companies in slow-growth industries.

These investors focus on companies that pay high dividends like utilities and real estate

investment trusts (REITs), although many times they may invest in companies

undergoing significant business problems whose share prices have sunk so low that the

dividend yield is consequently very high.

Quality: Most investors today use a hybrid of value, growth, and GARP approaches.

These investors are looking for high-quality businesses selling for ―reasonable‖ prices.

Although they do not have any shorthand rules for what kind of numerical relationships

there should be between the share price and business fundamentals, they do share a

similar philosophy of looking at the company’s valuation and at the inherent quality of

the company as measured both quantitatively by concepts like Return on Equity (ROE)

and qualitatively by the competence of management. Many of them describe themselves

as value investors, although they concentrate much more on the value of the company

as an ongoing concern rather than on liquidation value.

Warren Buffett of Berkshire Hathaway is probably the most famous practitioner of this

approach. He studied under Benjamin Graham at Columbia Business School but was

eventually swayed by his partner, Charlie Munger, to also pay attention to Phil Fisher’s

message of growth and quality.

GARP: Aside from being the name of the title character played by Robin Williams in

John Irving’s The World According to Garp, is an acronym for growth at a reasonable

price. The world according to GARP investors combines the value and growth

approaches and adds a numerical slant. Practitioners look for companies with solid

growth prospects and current share prices that do not reflect the intrinsic value of the

business, getting a ―double play‖ as earnings increase and the price/earnings (P/E) ratios

at which those earnings are valued increase as well.

One of the most common GARP approaches is to buy stocks when the P/E ratio is

lower than the rate at which earnings per share can grow in the future. As the company’s

earnings per share grow, the P/E of the company will fall if the share price remains

constant. Since fast-growing companies normally can sustain high P/Es, the GARP

investor is buying a company that will be cheap tomorrow if the growth occurs as

expected. If the growth does not come, however, the GARP investor’s perceived

bargain can disappear very quickly.

Quantitative Stock Fundamental Analysis – Buying Based on Numbers

Pure quantitative analysts look only at numbers with almost no regard for the underlying

business. The more you find yourself talking about numbers, the more likely you are to

be using a purely quantitative approach. Although even fundamental analysis requires

some numerical inputs, the primary concern is always the underlying business, focusing

on things like management’s expertise, the competitive environment, the market

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potential for new products, and the like. Quantitative analysts view these things as

subjective judgments, and instead focus on the incontrovertible objective data that can

be analyzed.

In recent years as computers have been used to do a lot of number crunching, many

―quants,‖ as they like to call themselves, have gone completely native and will only buy

and sell companies on a purely quantitative basis, without regard for the actual business

or the current valuation – a radical departure from fundamental analysis. ―Quants‖ will

often mix in ideas like a stock’s relative strength, a measure of how well the stock has

performed relative to the market as a whole. Many investors believe that if they just find

the right kinds of numbers, they can always find winning investments.

Company Size. Some investors purposefully narrow their range of investments to only

companies of a certain size, measured either by market capitalization or by revenues.

The most common way to do this is to break up companies by market capitalization

and call them micro-caps, small-caps, mid-caps, and large-caps, with ―cap‖ being short

for ―capitalization.‖ Different-size companies have shown different returns over time,

with the returns being higher the smaller the company. Others believe that because a

company’s market capitalization is as much a factor of the market’s excitement about

the company as it is the size, revenues are a much better way to break up the company

universe. Although there is no set breakdown used by all investors, most distinctions

look something like this:

MICRO - $100 million or less SMALL - $100 million to $500 million MID - $500 million to $5 billion LARGE - $5 billion or more

Arguments Against Quantitative Fundamental Stock Analysis.

Because quantitative analysis hinges on screens that anyone can use, as computing

horsepower becomes cheaper and cheaper many of the pricing inefficiencies

quantitative analysis finds are wiped out soon after they are discovered. If a particular

screen has generated 40% returns per year and becomes widely known, and if lots of

money flows into the companies that the screen identifies, the returns will start to suffer.

As ―fuzzy‖ as fundamental analysis might be, there are often times that knowing even a

little about the company you are buying can help a lot. For instance, if you are using a

high-relative-strength screen, you should always check and see if the companies you find

have risen in price because of a merger or an acquisition. If this is the case, then the

price will probably stay right where it is, even if the ―screen‖ you used to pick this

company has generated high annual returns in the past. All Stock nod fundamental and

technical analysis filters this ―fuzzy‖ data which allows pinpointed buy and entry signals

for any market.

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Stock Technical Analysis- What would you do if you truly believed that all information

about publicly traded companies was efficiently distributed and that nobody could get

an edge on anyone else by either understanding the business or analyzing the numbers?

You might consider simply giving up on beating the market’s returns by buying an index

fund. Some investors have taken an alternate route to find this technical stock analysis.

There are several technical analysis software programs available, but all require a steep

learning curve and long hours of tedious homework.

Technical Stock Analysis

If you find yourself asking – what do I need to be successful in the stock market – the

answer is technical analysis. It doesn’t matter if you’re a long-term investor or a short-

term trader. Technical analysis will make you a better trader.

Technical analysis is the study of how the price of a share of stock or index is moving

on a stock market chart. It usually involves the use of an indicator or oscillator to

measure various aspects of price, including trends, price ranges, price and volume

combinations, rate of change, etc. The idea for using technical analysis is that prices are

not completely random, but rather, they follow price patterns.

If you look at a chart you'll see that daily prices for the most part, connect from day to

day. The daily price of a stock has a relationship with the prior day’s action and so on.

Even stocks with volatile price movements have a day-to-day relationship and

subsequently, create a pattern of movement.

If we go a little deeper, technical analysis is also a way to read true trader sentiment

about a stock because what makes the price of a stock go up or down is whether the

majority of traders want to buy it or sell it. And so, price patterns are created when

buyers and sellers react/respond to price action.

Some of the most used technical indicators are:

Moving average

MACD

Stochastic

RSI

Average Directional Index (ADX)

Moving average

A moving average (MA) is an average of price over a defined period of time for a stock

or index. The line generated by this formula will signal a trending (upward or

downward) or a non-trending price direction of a stock or index.

You’ll frequently see a combination of two time periods applied to a chart. Popular

combinations are:

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10 and 30

20 and 50

50 and 200

These lines will give you significant information about how price is moving. For

example, when both lines are simultaneously moving in a direction or crossing over one

another. There are two common, but slightly different MA calculations – simple and

exponential.

Simple Moving Average (SMA)

The SMA is calculated by taking the closing price of a stock or an index for a number

of days, adding them up and dividing the figure by that number of days to get a SMA of

price.

In the example below of the $NYA (NYSE Composite Index), the 20-day (red line) and

50-day (blue line) SMA overlays are applied to the chart.

MACD (Moving Average Convergence Divergence)

A trend-following momentum indicator that shows the relationship between two moving

averages of prices. The MACD is calculated by subtracting the 26-day exponential

moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called

the "signal line", is then plotted on top of the MACD, functioning as a trigger for buy

and sell signals.

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Explains 'Moving Average Convergence Divergence - MACD'

There are three common methods used to interpret the MACD:

1. Crossovers - As shown in the chart above, when the MACD falls below the signal

line, it is a bearish signal, which indicates that it may be time to sell. Conversely, when

the MACD rises above the signal line, the indicator gives a bullish signal, which suggests

that the price of the asset is likely to experience upward momentum. Many traders wait

for a confirmed cross above the signal line before entering into a position to avoid

getting getting "faked out" or entering into a position too early, as shown by the first

arrow.

2. Divergence - When the security price diverges from the MACD. It signals the end of

the current trend.

3. Dramatic rise - When the MACD rises dramatically - that is, the shorter moving

average pulls away from the longer-term moving average - it is a signal that the security is

overbought and will soon return to normal levels.

Traders also watch for a move above or below the zero line because this signals the

position of the short-term average relative to the long-term average. When the MACD is

above zero, the short-term average is above the long-term average, which signals upward

momentum. The opposite is true when the MACD is below zero. As you can see from

the chart above, the zero line often acts as an area of support and resistance for the

indicator.

Stochastic

A technical momentum indicator that compares a security's closing price to its price

range over a given time period. The oscillator's sensitivity to market movements can be

reduced by adjusting the time period or by taking a moving average of the result. This

indicator is calculated with the following formula:

%K = 100[(C - L14)/(H14 - L14)]

C = the most recent closing price

L14 = the low of the 14 previous trading sessions

H14 = the highest price traded during the same 14-day period.

%D = 3-period moving average of %K

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Relative Strength Index - RSI

A technical momentum indicator that compares the magnitude of recent gains to

recent losses in an attempt to determine overbought and oversold conditions of an

asset. It is calculated using the following formula:

RSI = 100 - 100/(1 + RS*)

*Where RS = Average of x days' up closes / Average of x days' down closes.

Relative Strength Index (RSI)

As you can see from the chart, the RSI ranges from 0 to 100. An asset is deemed to

be overbought once the RSI approaches the 70 level, meaning that it may be getting

overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches

30, it is an indication that the asset may be getting oversold and therefore likely to

become undervalued.

Explains 'Relative Strength Index - RSI'

A trader using RSI should be aware that large surges and drops in the price of an asset

will affect the RSI by creating false buy or sell signals. The RSI is best used as a

valuable complement to other stock-picking tools

Average Directional Index Indicator (ADX)

The average directional index (ADX) is the king of trend indicators and can

absolutely work to determine trend. It gives a clear, easy-to-read picture of what is

happening with the market by providing a value to trend strength and insight to

whether a trend is strengthening or weakening.

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This is the indicator I personally use to determine whether to enter long or short

positions or to stand aside in cash. It also helps me to see if I should tighten my stops

when trends begin to weaken.

The next two indicators, Moving Averages (MAs) and Parabolic SAR can help with

determining trend or confirm a move.

Conclusion

In this complex task of stock market prediction input parameters plays an important

factor as the choice of improper input variable may lead to lower accuracy.

Some parameters have big influence on stock price while some have less influence and

hence it is important to select correct set of inputs. Mostly Technical analysis variables

are used predominantly in machine learning techniques. Some tried to use different

variable like fundamental variables, microeconomic indicators, news articles, etc. We

found that while predicting stock market index microeconomic indicators have major

influence over other. On the other hand while predicting stock price other factors have

major influence. In case of using news articles it is important to find correct meaning

that news article otherwise it will worsen prediction ability.

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From this survey we can conclude that hybridized parameters like combination of

technical and fundamental variable give better prediction accuracy over application of

standalone parameters.

References

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stock-trading-warrior http://www.stock-trading-warrior.com/Stock-Trading-Parameters.html online

Available 09/02/2014

investinganswers.com http://www.investinganswers.com/financial-dictionary/technical-analysis/relative-

strength-index-rsi-850 online Available 09/02/2014

Robert D. Edwards ,John Magee and W.H.C. Bassetti.—Technical Analysis of Stock Trends‖, 8th Edition 2001

chapter

Sneha Soni ―Applications of ANNs in Stock Market Prediction: A Survey‖, ISSN : 2229-3345 Vol. 2 No.

Zabir Haider Khan, Tasnim Sharmin Alin, Md. Akter Hussain,‖ Price Prediction of Share Market using

ArtificiaNeural Network (ANN)‖, International Journal of Computer Applications (0975 – 8887) Volume 22– No.2,

May 2011.

Kyoung-jae Kim A Won Boo Lee ― Stock market prediction using artificial neural networks with optimal feature

transformation‖ Springer-Verlag London Limited 2004.

Oleksandr Yefimochkin,‖ FUNDAMENTAL:Using Macroeconomic Indicators and Genetic Algorithms in

Stock Market Forecasting‖, Master thesis,O ctober 2011.