The goal of each forex player is to multiply the invested money. To achieve it, each player has to perform appropriate transactions in a good time. In order to determine the timing and the transaction, stock exchange players have can use a number of tools. One of the commonly used tools are indicators which, based on current market behavior, can tell likely future changes in prices.
Currency trading software for individuals, provided by the brokerage house, provides build in all the most widely known indicators. The effectiveness of the indicator is, however, difficult to determine. To determine how efficient each indicator is, I will execute a series of tests, and the results will be published on the blog.
The most common test is based on historical data. In such tests, the test cases can be created basing on indicator parameters, which are:
- Time period
- The currency pair
- Stop Loss and Take Profit - signals to closing
- Other attributes depending on the concrete indicator (calculation period, number of bars, etc.)
In addition, the indicators have different interpretations, so you can use them in different ways, which gives you great flexibility but also increases the number of test cases needed to be checked.
My tests will use JForex framework developed by Dukascopy Swiss bank. JForex framework includes more than 100 indicators which can be used in JForex Platform, or in your own Java application.
For each indicator, I will prepare as much test cases as possible, with purpose to show whether the indicator is worth using, and how to use it, in case to achieve the higher profit.
Forex (Foreign Exchange) is a market where you can buy and sell currencies and make money on changes in exchange rates. Due to small differences between buying and selling prices (spread), even a small change in the price is an opportunity to get profit.Exchange rate changes are calculated in pips (percentage in points). Normally one pip is worth 1/10000th part of the currency, which is located on the fourth decimal place. One way to further increase profits in the forex market is the leverage, which is offered to players by brokerage houses. This means that by investing $ 1,000 and borrowing $ 99 000 from the broker, player is able to invest a total of $ 100 000. Due to spread (difference between buy and sell price) below 1 pip and easily accessible leverage, Forex is a market where you can quickly multiply capital. Unfortunately it is also just as easy to lose money, so it's important to have a good investment strategy.
Playing without a specific strategy is more like playing in a casino. The most famous game in the casino is roulette, and most popular form of the game is to bet the color - black or red.
In a typical roulette there are 37 pockets on the wheel - 18 black, 18 red, and zero. This gives the player the probability of winning 18 to 37, or 48.65%. In this arrangement, the casino will win with probability 51.35%. It is enough that in the long term (with a large number of rounds played) casino will win. It will also cause loosing all the money of the majority of customers.
The most important about investing in the Forex is having a good investment strategy. If you have a strategy which accuracy is greater than 50%, in the long term after the number of transactions you will take profit. Otherwise, sooner or later you will lose all your money. The task seems to be very simple. You just have to develop, or use an existing strategy, which will make decisions with more than 50 percent accuracy.
However, there are some problems - it is the spread between the buying and the selling price, which is equivalent to zero in roulette. And so, if you determine your stop loss (price below which we will automatically close position to avoid further loss) and take profit (price above which we will automatically close position to take profit on required level) at 20 pips, after opening the trade, spread (difference between buy and sell price) may cause that we have to earn one more pip to close the position with profit.
The easiest way to create an investment strategy is to use one of the existing and well-known indicators. Those indicators can tell you when to buy or sell particular currency. However, does those indicators have accuracy greater than 50% (including brokers spread)?
In the next posts I will publish detailed results of the tests of popular indicators for the Forex market.
