Quantifying the Volatility of Stock Price Changes in the Indian Market Using the Moving Average Envelope and Bollinger Bands
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Abstract
A trading system in any stock market is built on long-term, intermediate-term,
and short-term indicators. Some ‘lagging’ indicators, such as the simple and exponential
moving averages, can be used to determine the direction of a medium- to long-term
trend. Some ‘leading’ oscillators, on the other hand, can tell a trader whether or not a
trend is losing momentum. This paper examines how well moving average envelopes and
Bollinger Bands measure stock price volatility, and how useful these technical analysis
tools are for short-term horizons. The paper then attempts to evaluate the speed of these
indicators in order to explain the sensitivity and response time of data collected from a
secondary survey in the Indian capital market. The article concludes that moving average
envelopes outperform Bollinger Bands in real trading settings, since technical trading
rules are generally designed for short-term investments. Bollinger Bands can detect
abrupt price fluctuations, however they are not more effective than moving average
envelopes to measure profitability.
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