Bharati - Bank Nifty - Research Paper

Impact of Moving Average Convergence Divergence Indicator on Individual’s
Decision Making with Special Reference to Bank Nifty Option Trading
Dr. Bhaskar V. Patil#1 Dr. Deepali M. Gala#2

#1
Assistant Professor, Bharati Vidyapeeth (Deemed to be University), Institute of Management, Kolhapur
[M.S.], INDIA.
#2
Assistant Professor, Bharati Vidyapeeth (Deemed to be University), Institute of Management, Kolhapur
[M.S.], INDIA.
#1
bhaskarpatil2881@gmail.com #2deepaligala19@gmail.com
Abstract- Investors and traders are constantly on the lookout for profitable stock market trading strategies
for which they use different technical analysis tools to predict price changes and decide accordingly.
Technical metrics, both lagging and leading, are used to obtain an advantage when making investment or
trading decisions. The trading rules are employed based on analysing historical market data to identify the
patterns. In this paper, studies of key Technical indicator like Moving Average Convergence Divergence
(MACD) with the different setting parameter for both effective and profitable decision making in Bank Nifty
option trading.
Keywords: Technical Indicator, MACD, Option Trading, Bank Nifty
1. Introduction
In the stock market, there are a variety of option trading strategies that can provide traders with the right
indications (entry and exit prices) at the right time. Traders and investors face a difficult challenge in
accurately predicting strike rates. The movement of option prices is determined by economic, social,
political, and psychological factors. The following methods can be used to forecast or estimate option prices:
fundamental analysis, technical analysis, and time series forecasting. Each method has its own set of
advantages and disadvantages.
A technical trading strategy is made up of a collection of trading rules for generating trading signals. A
simple trading system usually has one or two parameters for varying the timing of trading signals. The
results of the parameterizations are the trading rules found in a system. Technical research assumes that stock
prices follow patterns determined by investors' continuously shifting perceptions in response to various
forces. Technical analysis is based on the idea that history repeats itself and that past prices can be used to
predict future market direction.
2. Overview of Option and the Stock Market

Option is a financial instrument whose value depends upon the value of the underlying assets. Option
itself has no value without underlying assets. Option gives the right to the buyer either to sell or to buy the
specified underlying assets for a particular price (Exercise / Strike price) on or before a particular date
(expiration date). If the right is to buy, it is known as “call option” and if the right is to sell, it is called as
“put option”. The buyer of the option has the right but no obligation either to buy or to sell. The option buyer
has to exercise the option on or before the expiration date, otherwise, the option expires automatically at the
end of the expiration date. Hence, options are also known as contingent claims.
Options can be used in a variety of ways to profit from a rise or fall in the underlying asset market. The
most basic strategies employ put and call options as a low capital means of garnering a profit on market
movements, known as leveraging.
3. Key Technical Indicator for Effective and Profitable Strategy

A technical indicator is a series of data points that are derived by applying a formula to the price data of
the stock. Technical indicators provide unique perspective on the strength and direction of the price action of
the strike price of option. Indicators serve three main functions: to alert, to confirm and to predict. There are
hundreds of indicators in use today. We are focusing on Moving average convergence divergence (MACD)
indices in this paper.
3.1 Moving average convergence divergence[MACD]
MACD is another trading indicator used for analyzing the strength, direction and momentum in the
stock’s price. MACD is calculated based on the difference between the shorter and longer exponential
moving average calculated for deciding the trend. Thus it becomes more accurate as first EMA is calculated
and based on the difference between the two MACD is calculated. MACD depends on three time parameters,
namely the time constants of the three EMAs. By comparing EMAs of different lengths, the MACD series
gauges the changes in the trend of a stock. The difference between the MACD series and its average reveals
the subtle shifts in the strength and direction of a stock's trend. Bearish divergence and bullish divergence are
the two indicators which help the trader in call and put strategies. When the MACD line is declining
indicates fall in price and when MACD line is increasing it indicates price could rise.
3.2.1 Buy and Sell Signals
A trader can find buying or selling signal based upon MACD indicator. The default setting of MACD
indicator is, Faster line is 12. Slower line is 26 and Signal length is 9 for finding buying and selling signal for
intraday, positional or long term trading in bank nifty option trading.
When MACD line crossover to signal line then there will be buying signal. And signal line crossover to
MACD line then there will be selling signal. If positive crossover above ‘0’ line then buying signal or
positive crossover bellow ‘0’ line and go up above ‘0’ line then strong buying signal. If negative crossover
bellow ‘0’ line then selling signal or negative crossover above ‘0’ line and both lines are going down below
‘0 line then strong selling signal. The bellow figures are shows that how multiple buying and selling are
generated for different time frame.
Figure No. 3.2.1- MACD , Time Frame - 05Min

From the Figure No. 3.2.1- MACD , Time Frame - 05Min, it is observed that when we are applied MACD
indicator for bank nifty on 5 min time frame, there will be multiple buying and selling signal are generated.
This will help for booking small profit with small interval of time.
Figure No. 3.2.1- MACD , Time Frame - 15Min
From the Figure No. 3.2.2- MACD , Time Frame - 15Min, it is observed that when we are applied MACD
indicator for bank nifty on 15 min time frame, there will be strong buying and selling signal are generated.
This will help for booking profit with larger interval of time and trader can also go for next day trading.
Figure No. 3.2.1- MACD , Time Frame – 1 Day

From the Figure No. 3.2.3- MACD , Time Frame – 1 Day, it is observed that when we are applied MACD
indicator for bank nifty on 1day time frame, there will be strong buying and selling signal are generated. This
will help for booking larger amount of profit with large time frame and trader can also hold for long term
trading.
4. Conclusion
Thus this indicator when efficiently used helps in making exact technical analysis which in turn helps in
deciding the right time to enter and get exited from the market. Since indicator like Moving average
convergence divergence (MACD) uses its own past performance to predict the future movement, they
become more reliable and effective in decision making of call and put option related to buying Bank Nifty
option trading.
6. Acknowledgments
The researchers are grateful to the authors, writers, and editors of the books and articles, which have
been referred for preparing the presented research paper. It is the duty of researcher to remember their
parents whose blessings are always with them.
7. References
[1] Sudheer, V., Trading Through Technical Analysis: An Empirical Study From Indian Stock Market, International
Journal of Development Research, Vol. 5, Issue, 08, pp. 5410-5416, August, 201, 5410-5416
[2] Pushpa BV, Sumithra C.G, Madhuri Hegde, Investment Decision Making Using Technical Analysis: A Study on
Select Stocks in Indian Stock Market, IOSR Journal of Business and Management (IOSR-JBM) e-ISSN: 2278-
487X, p-ISSN: 2319-7668. Volume 19, Issue 9. Ver. VI. (September. 2017), PP 24-33
[3] Talwar Shalini, Shah Pranav, Shah Utkarsh, Picking Buy-Sell Signals: A Practitioner’s Perspective On Key
Technical Indicators For Selected Indian Firms, Studies in Business and Economics no. 14(3)/2019,205-219
[4] Jan Ivar Larsen, Predicting Stock Prices Using Technical Analysis and Machine Learning, Norwegian University of
Science and Technology Department of Computer and Information Science, June 2010,1-81
[5] International School of Financial of Markets, Options Trading Strategy,3-15
[6] Ranjit Singh, Reshampal Kaur, Effective and Profitable Stock Trading Strategy, International Journal of
Management & Business Studies, IJMBS Vol. 4, Iss ue 1, Jan - March 2014, 36-38
[7] Kadida Ramadhani Shagilla Mashaushi, An Analysis of Technical Trading Strategies, The University of Leeds
Leeds University Business School, September, 2006, 2-213

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Impact of Moving Average Convergence Divergence Indicator on Individual’s

Decision Making with Special Reference to Bank Nifty Option Trading

Dr. Bhaskar V. Patil#1 Dr. Deepali M. Gala#2

Keywords: Technical Indicator, MACD, Option Trading, Bank Nifty

2. Overview of Option and the Stock Market

3. Key Technical Indicator for Effective and Profitable Strategy

Figure No. 3.2.1- MACD , Time Frame - 05Min

Figure No. 3.2.1- MACD , Time Frame – 1 Day

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