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Thing to Consider When Making a Technical Analysis-based Strategy

Even though it’s very popular among investors and traders alike, technical analysis still has its fair share of criticisms and doubts coming from, well, skeptics and doubters.  It’s quite reasonable, given the fact that technical analysis cannot alone guarantee a fool-proof trading Traders Account strategy.

On the flip side, there’s also no denying that technical analysis has brought huge amounts of profits, and thus challenged the assumptions of the efficient market hypothesis.  

If you’re planning to put up technical analysis-based Corporate Account trading system, you have to keep in mind the following things.

Choose the Swiss Franc and the Japanese Yen

According to a multitude of studies, the Swiss franc and the Japanese yen are the two currencies that are the easiest top predict.  The widely accepted theory behind this phenomenon seems to be the fact that the currencies are most prone to intervention, which in turn is possibly because they are both safe-haven currencies for international investors.

The Use of Neural Networks for System Optimization

Neural networks sport the ability to spot obscure patterns in data.  And this ability enables them to be perfect for foreign exchange markets.  And because of this, most of the current research on the subject has neural networks at its core.

Logarithmic Returns and Moving Averages

There is at least one study that showed that moving averages and logarithmic returns are two of the best inputs for foreign exchange trading models, specifically when analyzing CHF and JPY.

Some Caveat from the Opposing View

Many researchers and critics still dispute the effectiveness of a technical analysis-based trading system.   Since the system uses suspect testing data samples or excessively-customized trading systems, researchers argue that the results from such studies can be misleading.

Overall, it is difficult to tell without really applying the system to new data sets, but traders, like you, should be well aware of the concerns.  And among the two major concerns are:

Data Dredging

There are studies that have used data mining techniques in order to determine misleading relationships in data.  In such cases, the performance of a test system may be valid within the testing data, although it wouldn’t have any statistical significance in the bigger population sample.

Curve Fitting

In some studies, there may have been curve fitting techniques that may produce reliable results for one data set, although it also suffers the shortcoming of inapplicability to a bigger population sample.

Conclusion

Technical analysis may not be totally proven to work in the stock markets, but there is a growing bunch of evidence of its efficiency in the forex markets.  The triumph has primarily been given to the easy nature of predictability of intervention that is seen in safe-haven currencies by central banks, ie the central banks of Japan and Switzerland, among others.  

However, researchers are still solidly skeptical due to the potential for at least two types of misleading analysis techniques.  This, on top of other disadvantages of technical analysis like its subjectivity and the noise surrounding it, makes other traders prefer other types of analysis over the technical one.