To what extent are the selected technical indicators useful in foreign exchange markets?

Abstract

The foreign exchange market or Forex is a worldwide system of traders where currency prices are established by supply and demand forces in the market. The leading market players are central banks, private and public institutions, and speculators. Profits are made by traders whose currency price expectations are matched by the actual price movements. The study initially highlights the two approaches used by traders to invest into financial assets; namely the technical and fundamental analysis. It then focuses on the assumptions and theoretical background of the technical analysis. This paper looks into a detailed description of the theory and application of the two selected technical indicators scilicet; Moving Averages and Stochastic Oscillator K%D. The strengths and weaknesses of the two indicators are highlighted for further comparison. The focal point of this dissertation is to identify strategies that optimize technical trading of the former two indicators. Trading strategies were tested using data sets with different price frequencies to further explore the potential efficiency and effectiveness of the indicators under consideration. The study parameters such as price frequencies used and the currency pairs selected have all reflected on the profitability of the indicators. The testing of the technical indicators identified a number of trading strategies that optimise the use of the selected technical tools. In particular, the profit-making strategies, applied to of the technical indicators, maximised gains and minimised losses in relation to the corresponding price frequency used. The Stochastic Oscillator has proven to be a more profitable indicator than the Moving Averages during the selected test period.