Back testing NEPSE with the Technical Analysis Chart Patterns!!

There is big controversy going around that technical analysis doesn't work on NEPSE so here I did some back testing on NEPSE index before that let's see what is technical analysis and its accuracy in the market.

What is Technical Analysis?

Basically, Technical analysis refers to the analysis of stock market using different chart patterns, volume and indicators. There are generally three assumptions:

1) Market discounts everything

2) Price moves in a trend

3) History trends to repeat itself

Is technical analysis 100% accurate?   

No, technical analysis is not 100% accurate. Not even fundamental analysis is 100% accurate. No one can predict the market 100%. Almost around 70% accuracy of technical analysis is expected.

Back testing of NEPSE index

This testing was done surfacy in NEPSE index and this does not mean that every chart patterns here gives 100% result. Most of the time chart patterns do fail and stop loss is hit but if you are able manage your risk to reward ratio there is always a win win situation in the market. There are few charts pattern I picked up from NEPSE index:

Here expectation refers to the example from the web and reality refers to how beautifully NEPSE index follows technical analysis chart pattern.

1) Symmetrical Triangle pattern

Expectation

Reality

2)Descending Triangle pattern

Expectation

Reality

3) Head and Shoulder

Expectation

Reality

4) M pattern

Expectation

Reality

5) W pattern

Expectation

Reality

6) Rounding Bottom pattern

Expectation

Reality

You just need skills to identify the chart patterns correctly and some confidence in yourself.

Why traders need to book profit?

On 27 July 2021, NEPSE index opened at 3030.51 and closed at 3079.67 with 29.24 (0.96%) points gain. NEPSE took 17 trading days dated from 27th July to 19 August, 2021 to gain 159.23 (5.19%) point. But it took only 3 trading days dated 19th August to 25th August to wipe all your profit that you earned from the last 17 days. Yes, we are in the bull run NEPSE is still expected to go further high but on the other side no one can predict Mr. market and things does not go always expected. So, make the habit of booking your profit. This strategy might not help to make enough out of this bull run but surely it will help you not to lose your profit that you have been making in this bull run and this strategy will surely be profitable to you when the market will be bearish. 

WHAT IF 90's CHILDREN HAD INVESTED IN STOCK MARKET IN NEPAL AT THE AGE OF 20?

People who were born around 1986-1996 are known as 90's kids. In 2016, people born in 1996 turned 20 in. Let's see what if they had invested in the Nepalese stock market then would be like.

Here is the growth of NEPSE with some of the popular index of Nepalese stock market from 2016/01/01 to 2021/04/13.

Nepse

NEPSE had a growth of around 135% from 2016 till now.

Banking

Banking sector had a growth of around 80% from 2016 till now.

Microfinance

Microfinance sector had a growth of around 190% from Nov 2017 till now. 

    

Life Insurance

Life Insurance sector had a growth of around 185% from 2018 till now.

Non-Life Insurance

Non-Life Insurance sector had a growth of around 132% from July 2018 till now.

Now, let's see what if we had invested Rs 1000 each in the above sector in 2016  assuming that the stock is sold every year and the return is utilized for 5 year i.e. compounding effect.

We could have made 3.5 times more than the initial investment amount.

* This is just a tentative figure. Here in Nepal, we cannot invest in indices and we might not get return while calculating on individual stock.

** Investment/Trading in securities Market is subject to market risk, past performance is not a guarantee of future performance.