1. IntroductionThailandFutures Exchange (TFEX) is a subsidiary of the Stock Exchange of Thailand (SET)and was established on May 17, 2004 as a derivatives exchange. TFEX uses thesame price/time priority rules as the equity market for order matching which refersto how orders are prioritized for execution. Orders are first ranked accordingto their price; orders of the same price are then ranked depending on when theywere entered. TFEX is allowed to trade Futures, Options and Options on Futureswhere the permitted underlying assets are equities(i.e.
, index and stocks), debt(i.e.,bonds mortgages and interest rate), commodities(i.e., gold, silver and crudeoil) and others(i.e.
, exchange rate and other as may be announce by the SEC).Infinance, a derivative is a financial instruments. Futures contracts, forwardcontracts, options, swaps, and warrants are common derivatives.
A futurescontract is a derivative because itsvalue is affected by the performance of the underlying contract. A stock optionis a derivative because its value is derived from that of the underlying stock.While a derivative’s value is based on an asset, ownership of a derivativedoesn’t mean ownership of the asset.
Derivative can be used for a number ofpurposes, including insuring against price movements (hedging), increasingexposure to price movements for speculation, etc. Derivatives allow investors to earn large returns from smallmovements in the underlying asset’s price. Investors could lose large amountsif the price of the underlying moves against them significantly, because of theuse of leverage, or borrowing. This is similar to a marginaccount when trading stocks. An initial margin will need to be deposited before each trade. Futures pricewill generally change daily, the difference in the prior agreed-upon price andthe daily futures price is settled daily. The exchange will draw money out ofone party’s margin account and put it into the other’s so that each party hasthe appropriate daily loss or profit.
If the margin account goes below amaintenance margin level, then a margin call is made and the account owner mustreplenish the margin account. Derivativesare required to use the trading name to facilitate trading and adhere touniversal principles. The name of the product will contain initials, month and yearof maturity. For example, s50z17, the first two alphabets “S50” mean a SET50Index Futures product that traded on TFEX.
SET50 Index was launched in 1995 andit is the first large-cap index of Thailand to provide a benchmark ofinvestment in the Stock Exchange of Thailand. It is calculated from the stockprices of the top 50 listed companies on SET in terms of large marketcapitalization, high liquidity. The last three alphabets “z17” are month andyear of maturity which code “z” use for December (i.e.,h for March, m for June and u for September) and “17” denoted year 2017. A wise focus of any investor oftechnical analysis is to study indicators that make sharper entry and exitpoints in his or her trading.
The Relative Strength Index (RSI) by J. Welles WilderJr. is one of the most popular technical indicators. We believe RSI can be improved by usingvolume to weight the index. Classic market tops are characterized by anincrease in volume. Technical indicators which rely only on price changes donot reflect the whole picture.
RSI’s failure to account for volume is a seriousdeficiency because volume can vary widely in market tops and bottoms. In aneffort to improve the RSI, Gene Quong and Avrum Soudack have devised a uniqueshort-term technical indicator called Money Flow Index (MFI). MFI is also known as volume-weighted RSI thatstarts with the typical price for each period. MFI is an oscillator that usesboth price and volume to measure buying and selling pressure. MFI is positivewhen the typical price rises (buying pressure) and negative when the typicalprice declines (selling pressure). MFI is used to determine the conviction in a currenttrend by analyzing the price and volume of a given security which is similar tothe RSI.
The main difference between MFI and RSI is that MFI also accounts forvolume, whereas the RSI do not accounts for volume. Many traders watch foropportunities that arise when the MFI moves in the opposite direction as theprice. This divergence can often be a leading indicator of a change in thecurrent trend.
MFI is one of the more reliableindicators of overbought and oversold conditions, because it uses the higherreadings of 80 and 20 as compared to the RSI’s overbought/oversold readings of70 and 30. Many traders commonly seek to buy and sell a stock in accordancewith the movement of this indicator. 2. ObjectivesThemain objective of this research is to find the optimum parameters of Money FlowIndex for trading derivatives, using s50z17 as a case study.
3. Materials and methodsThedaily Opening, High, Low, Closing prices and volume of S50z17 from December 29,2016 to November 30,2017, constitute the database of 227 observations to study. These data computed MoneyFlow Index (MFI) tomeasures the momentum in the market by determining how much money is going intoand out of the market. The value of the MFI is always between 0 and 100, andcalculating it requires several steps. Step one is to calculate the typicalprice. Second, the raw money flow is calculated. The next step is to calculatethe money flow ratio using the positive and negative money flows for the last ndays. Finally, using the money flow ratio, the MFI is calculated.
Formulas foreach of these items are as follows: 1. Compute the TypicalPrice equal to: TypicalPrice = (High + Low + Close) /32. Compute Raw MoneyFlow equal to: Raw Money Flow = Typical Price * dailyvolume3.
Calculate the Positiveand Negative Money Flow over the past n days by:Positive money flow is calculatedby summing up all of the money flow on the last n days where the typical price is higher than the previous period typical price. Thissame logic applies for the negative money flow4. Compute the MoneyFlow Ratio over a specified time period (n days) equal to: Money Flow Ratio = (PositiveMoney Flow) / (Negative Money Flow)5. Calculate the MoneyFlow Index as follows:Money Flow Index = 100 – (100/(1+Money Flow Ratio )) The aim of this research is to find the optimum parametersof MFI for trading derivatives, using s50z17 as a case study. The MFI must configuration3 parameters together.
The first parameter is a number of days vary from 2 to50. The second parameter is oversold zone vary from 1 to 49. The last is overboughtzone vary from 51 to 99. All parameters will adjust in order to find the entrypoint that making the best opportunity or the maximum profit as much aspossible. This research will initiates a newbuy position when the MFI indicator drops to oversoldzone or lower, and then holds the derivativeuntil the MFI indicator reach overbought zone orover.There are 2 limitations in this research. The first one, in real life whenwe trade derivative, we can trade both way. This mean, we can buy at low priceand then sell at high price later like trading in stock.
The other way that wecan’t do in stock is sell at high price first and then follow buy at low price.In this research study only the first way. The second limitation is commissionfee, each time to trade derivatives we must pay for commission fee, thisresearch don’t include it in net profit. 4.
Results and DiscussionConsidering the back test of whole s50z17 data, all possibleresults that generate form adjust 3 parameters werecalculated and found that.-Number of times to trade by MFI was between 0-32 times and the average wasabout 2 times.-The opportunity to win was between 50-100% which an average was 94.05%.
-The opportunity to lose was less than or equal 50% which an average was 5.47%. -The average profit and loss per trade was 30.
62 and 0.70 points respectively. – The maximum of profit and loss per trade, was 172.0 and 40.4 points respectively. -The average duration from buy to sell was 57.69 days.
Thedescriptive statistics of all case were shown as Table 1.