There is a research paper that was brough to my attention by one of the authors which finds that combining two types of information (fundamental and technical analysis) improves risk-adjusted performance of an investment strategy. This paper specifically addresses the success in 23 emerging markets.
I asked one of the author some questions. Here are their answers.
How long and how much research was put into the paper?
The four of us have spent in total about one man-year of work into creating this research paper. We will present it at the emerging markets conference at Cass Business School in London in May ’08.
Do you or the other researchers have experience as professional traders?
Two coauthors of mine are purely academic, but one is at ING Investment Management and I myself am at the Quant Strategies dpt of Robeco Asset Management. I would like to tell you about our quantititave strategies and how we apply our insights in real live portfolios, but our compliance departments do not allow this. So you could mention our affiliation with
professional investment teams, but nothing about the practical application.
What is the main attraction of the paper?
I think the main attractor of the paper is the (slightly changed) abstract: The authors measure the profitability from fundamental and technical trading rules for emerging markets currency investments. Using a sample of 23 emerging markets with a floating exchange rate regime over the period 1995-2007, they document that both types of information can be exploited to implement profitable alpha trading strategies. In line with evidence from surveys of foreign exchange professionals concerning the use of fundamental and technical analysis, the authors find that combining the two types of information improves the risk-adjusted performance of the investment strategies, with Sharpe ratios above 1.4 for emerging currency markets and above 0.5 for developed currency markets. These results indicate that active currency traders may wish to expand their strategies to emerging currency markets, where alpha opportunities seem to be larger.
You can download the paper from http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1088222
Thanks to Forex2stay for the following comments. Visit his blog at http://forex2stay.blogspot.com/
I do think it's possible, but I believe money mangement is the key.
This needs to be a marathon not a sprint. One thing I've realized is
that you can't use the same lot sizes for all of your trades. For
example on one trade you might be risking 30 pips and another 20 pips.
So if you trade 4 lots on both of them (standard account) you'd be
risking $1,200 on one trade and $800 on the other. That's not good
money management and it can get you a person in trouble.Here's what I do…..
I position trade (4hr and daily charts), I won't trade unless I have a
2:1 risk reward ratio. I figure out the proper stop loss for my trade,
based on TA. So for this example say that's 40 pips. I then make sure
based on TA that I'm comfortable getting at least 80 – 120 pips profit.
Once i'm comfortable I put my information into the following formula.
S=(E*R) / (P-X)
S = Size of Trade
E = Account size (Cash)
R = Maximum Risk percentage per trade
P = entry price on the trade
X = pre-determined stop loss or exit price
So let's put in some numbers…..
My account size $10, 000
Entry price on EUR/USD 1.2600
Currently I'll risk 3% of my account on a trade
My pre-determined SL is 1.2560
So how many shares of EUR can we buy with our money management rules??
S=($10,000 * 3%) / (1.2600 – 1.2560)
S = $300 / .40
Anyway this is the way I do it. I hope it helps…
I stated a couple of days ago that I would try to analyze the market as if I was a Currency Strategist. I have no idea what it takes to be a Currency Strategist but I made an attempt today to analyze the EUR/USD for the upcoming week.
The EUR/USD has had 7 straight weeks of alternating price action (down, up, down, up, down, up, and down.) The 3 weeks prior to last, we had higher highs and higher lows but last week, the EURO failed to push above the prior high of 1.2208. The price closed on Friday at 1.2037.
A dark cloud occurred (which indicates that prices moved up strongly on the previous bar, opened higher, but then closed significantly lower). This implies weakness as the momentum appears to be shifting from the bulls to the bears.
We have support below from the 8 and 21 EMA’s at 1.2020. The 50 and 100 EMA’s at close above at 1.2144 and 1.2133 respectively. The 200 EMA provides longer term support at 1.1720.
MACD – Bullish
Stochastic – Bullish
RSI(7) – Neutral
RSI(14) – Neutral
DMI – Neutral and Trendless
Resistance: 1.2217, 1.2330
Support: 1.1785, 1.1868, 1.2000
Squeeze in progress since 1/27/06. The last exit from a squeeze was 11/11/2005.
Commitment of Traders Report
As you can see from my graph, non-commercial positions are building on the long side.
Bollinger Bands are 41.41% narrower than normal. eur is currently experiencing very low volatility as compared to its normal range. The probability of volatility increasing with a sharp price move is likely in the near future.
EUR/USD may remain in the 1.2000 – 1.2200 range. If the psychological important 1.2000 is broken, look for furthur downside to 1.1868.