1. Introduction

Thailand

Futures 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 the

same price/time priority rules as the equity market for order matching which refers

to how orders are prioritized for execution. Orders are first ranked according

to their price; orders of the same price are then ranked depending on when they

were entered. TFEX is allowed to trade Futures, Options and Options on Futures

where 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 crude

oil) and others(i.e., exchange rate and other as may be announce by the SEC).

In

finance, a derivative is a financial instruments. Futures contracts, forward

contracts, options, swaps, and warrants are common derivatives. A futures

contract is a derivative because its

value is affected by the performance of the underlying contract. A stock option

is 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 derivative

doesn’t mean ownership of the asset. Derivative can be used for a number of

purposes, including insuring against price movements (hedging), increasing

exposure to price movements for speculation, etc.

Derivatives allow investors to earn large returns from small

movements in the underlying asset’s price. Investors could lose large amounts

if the price of the underlying moves against them significantly, because of the

use of leverage, or borrowing. This is similar to a margin

account when trading stocks.

An initial margin will need to be deposited before each trade. Futures price

will generally change daily, the difference in the prior agreed-upon price and

the daily futures price is settled daily. The exchange will draw money out of

one party’s margin account and put it into the other’s so that each party has

the appropriate daily loss or profit. If the margin account goes below a

maintenance margin level, then a margin call is made and the account owner must

replenish the margin account.

Derivatives

are required to use the trading name to facilitate trading and adhere to

universal principles. The name of the product will contain initials, month and year

of maturity. For example, s50z17, the first two alphabets “S50” mean a SET50

Index Futures product that traded on TFEX. SET50 Index was launched in 1995 and

it is the first large-cap index of Thailand to provide a benchmark of

investment in the Stock Exchange of Thailand. It is calculated from the stock

prices of the top 50 listed companies on SET in terms of large market

capitalization, high liquidity. The last three alphabets “z17” are month and

year 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 of

technical analysis is to study indicators that make sharper entry and exit

points in his or her trading. The Relative Strength Index (RSI) by J. Welles Wilder

Jr. is one of the most popular technical indicators. We believe RSI can be improved by using

volume to weight the index. Classic market tops are characterized by an

increase in volume. Technical indicators which rely only on price changes do

not reflect the whole picture. RSI’s failure to account for volume is a serious

deficiency because volume can vary widely in market tops and bottoms. In an

effort to improve the RSI, Gene Quong and Avrum Soudack have devised a unique

short-term technical indicator called Money Flow Index (MFI). MFI is also known as volume-weighted RSI that

starts with the typical price for each period. MFI is an oscillator that uses

both price and volume to measure buying and selling pressure. MFI is positive

when the typical price rises (buying pressure) and negative when the typical

price declines (selling pressure).

MFI is used to determine the conviction in a current

trend by analyzing the price and volume of a given security which is similar to

the RSI. The main difference between MFI and RSI is that MFI also accounts for

volume, whereas the RSI do not accounts for volume. Many traders watch for

opportunities that arise when the MFI moves in the opposite direction as the

price. This divergence can often be a leading indicator of a change in the

current trend. MFI is one of the more reliable

indicators of overbought and oversold conditions, because it uses the higher

readings of 80 and 20 as compared to the RSI’s overbought/oversold readings of

70 and 30. Many traders commonly seek to buy and sell a stock in accordance

with the movement of this indicator.

2.

Objectives

The

main objective of this research is to find the optimum parameters of Money Flow

Index for trading derivatives, using s50z17 as a case study.

3.

Materials and methods

The

daily 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 Money

Flow Index (MFI) to

measures the momentum in the market by determining how much money is going into

and out of the market. The value of the MFI is always between 0 and 100, and

calculating it requires several steps. Step one is to calculate the typical

price. Second, the raw money flow is calculated. The next step is to calculate

the money flow ratio using the positive and negative money flows for the last n

days. Finally, using the money flow ratio, the MFI is calculated. Formulas for

each of these items are as follows:

1. Compute the Typical

Price equal to:

Typical

Price = (High + Low + Close) /3

2. Compute Raw Money

Flow equal to:

Raw Money Flow = Typical Price * daily

volume

3. Calculate the Positive

and Negative Money Flow over the past n days by:

Positive money flow is calculated

by summing up all of the money flow on the last n days

where the typical price is higher than the previous period typical price. This

same logic applies for the negative money flow

4. Compute the Money

Flow Ratio over a specified time period (n days) equal to:

Money Flow Ratio = (Positive

Money Flow) / (Negative Money Flow)

5. Calculate the Money

Flow Index as follows:

Money Flow Index = 100 – (100/(1+

Money Flow Ratio ))

The aim of this research is to find the optimum parameters

of MFI for trading derivatives, using s50z17 as a case study. The MFI must configuration

3 parameters together. The first parameter is a number of days vary from 2 to

50. The second parameter is oversold zone vary from 1 to 49. The last is overbought

zone vary from 51 to 99. All parameters will adjust in order to find the entry

point that making the best opportunity or the maximum profit as much as

possible. This research will initiates a new

buy position when the MFI indicator drops to oversold

zone or lower, and then holds the derivative

until the MFI indicator reach overbought zone or

over.

There are 2 limitations in this research. The first one, in real life when

we trade derivative, we can trade both way. This mean, we can buy at low price

and then sell at high price later like trading in stock. The other way that we

can’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 commission

fee, each time to trade derivatives we must pay for commission fee, this

research don’t include it in net profit.

4.

Results and Discussion

Considering the back test of whole s50z17 data, all possible

results that generate form adjust 3 parameters were

calculated and found that.

–

Number of times to trade by MFI was between 0-32 times and the average was

about 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.

The

descriptive statistics of all case were shown as Table 1.