Composing a technical analysis based trading strategy in foreign exchange market

Abstract

Trading in foreign exchange market is becoming more and more popular for retail traders while the segment composes 8-10 % of the overall foreign exchange market turnover. On the other hand, based on brokers‘ survey, less than half of the retail trading accounts were profi table in Q4, 2014. This fact raises a question why so many traders are unable to make profits while trading in foreign exchange markets. With technical analysis is gaining popularity in foreign exchange markets, an attempt to make a forex trading strategy based on technical analysis tools is done in the study. After presenting the research in the technical analysis field and discussing on essential components of a proper trading strategy, a forex trading strategy was composed. Although during the randomly selected period for the research the trading rules based on the technical analysis showed negative results, the performance of the strategy was improved by applying stop loss positions for the trades. Therefore it is showed that negative performance of the trading strategy can be solved by managing losses from the trades, on the other hand, the position might be stopped out because of market volatility.