Testing of methods used for currency rate analysis and forecasting Cover Image

Valiutų kursų analizei ir prognozavimui naudojamų metodų testavimas
Testing of methods used for currency rate analysis and forecasting

Author(s): Jonas Nedzveckas, Rimantas Dapkus
Subject(s): Recent History (1900 till today), International relations/trade, Policy, planning, forecast and speculation, Financial Markets
Published by: Lietuvos verslo kolegija
Keywords: FOREX; RSI; oscillator; moving averages; technical analysis; investment environment; currency market; dealing centre;

Summary/Abstract: Integration of the economies of individual countries encourages the development of international exchanges and settlements in different currencies and results in annually increasing volumes of international currency market transactions. In 1971, when the Bretton-Woods system of monetary management was brought to an end and transition was made towards floating rates, the possibility of speculation has emerged, i.e. making a profit on continually changing currency rates. FOREX became the world’s most dynamic and liquid market – the only market active round the clock. Scientists propose a wide variety of solutions to the problem of forecasting exchange rates which is relevant to many actors of the global currency market. One of the instruments used to forecast the Forex market is a technical analysis. However, none of the models developed so far have proved to be suitable for all cases in the currency market as once a model earns popularity and worldwide recognition it loses its profitability due to universal use. Therefore, theoreticians and practitioners of the theoretical analysis try to regularly improve theoretical analysis instruments in order they could better reflect the tendencies of the modern currency market. Based on actual data about variations in the rate of EUR to USD, the article presents an evaluation on which of the widely known methods of technical analysis used for currency rate forecasting could bring the highest profit. The study tested four most popular strategies on investments in Forex markets: the strategies of moving average intersection, moving average convergence/divergence, RSI oscillator and stochastic indicator. The testing has shown that the best strategy of those at issue is the strategy of RSI oscillator, as the appropriate selection of parameters can lead to as high profitability as 18.46 % during six months. However, it is necessary to mention another distinguishing feature of the RSI oscillator strategy – few transactions were effected when trading under this strategy. In the event of the optimum strategy (the most profitable version) a mere 139 deals were closed during six months. When using the RSI strategy a mid-term period (RSI 14, RSI 18, etc) is the best selection. Upon choosing RSI oscillators of particularly short periods marginal values are often obtained, which results in a big number of false purchase and sale signals. Classical levels of resold and repurchased markets representing respectively 30 % and 70 % serve the purpose best in the case of 14-days’ RSI. The use RSI’s combination 14 during the test period produced the highest profit.

  • Issue Year: 22/2013
  • Issue No: 1
  • Page Range: 121-126
  • Page Count: 6
  • Language: Lithuanian