Technical Analysis Of Forex By MACD Indicator
See discussions, stats, and author profiles for this publication at: Technical analysis of Forex by MACD IndicatorArticle · April 2013CITATIONSREADS04031 author:Ziba Habibi LashkaryUniversidad de Valladolid4 PUBLICATIONS 2 CITATIONSSEE PROFILEAll in-text references underlined in blue are linked to publications on ResearchGate,letting you access and read them immediately.Available from: Ziba Habibi LashkaryRetrieved on: 06 November 2016
International Journal of Humanities and Management Sciences (IJHMS) Volume 1, Issue 2 (2013) ISSN 2320–4044 (Online)Technical analysis of Forex by MACD IndicatorSeyed Hadi Mir Yazdi and Ziba Habibi Lashkarifactors in forex transactions which would provide a basis todetermine that country’s currency’s value are economicindicators of a country and predictions of future economicperformance. Accent to arrive at a fair value of currencybetween that country and other countries is put on interest ratedifferentials, the agent who trade by using fundamentalanalysis is fundamentalist[5].Abstract—In these days, trading automation is one of themajor topics in the field of financial research. Buy and sell arethe key rule to an automated trading system which is possibleto generate by various technical indicators in Forex. Benefitsand disadvantages of each indicators, has its own. Regardingto our first research result which was based on P-sar indicatorand published in the IIAFC conference[1]. In this paper, wewill focus on the MACD indicator for four currencies namelyEURUSD, GBPUSD, USDCHF and USDJPY individually toidentify effectiveness of the indicator regarding to the amountof profit generated, using hourly data of market stretch fromJanuary 2001 to December 2010. Virtual Historical TradingSoftware (VHTS) is developed for the purpose of computingthe indicator based on its original formulas and interpretations;for applying the assumptions; for trading based on buy and sellsignals generated by the MACD indicator.B. Technical Analysis in ForexTechnical analysis (TA) or charting that usually includeprice and volumes by utilizing historical data created bymarket reaches at future currency price movements[6]. TA hasreceived little attention by academicians, though, it has beenapplied for more than hundred years [7-9].Quantitative andqualitative are two main analytical concepts for TA. Thequantitative- based analysis tries to make indicators such asMACD and P-SAR while the qualitative-based analysisdepends on clarification of the shape of geometric patterns likelevels of support and resistance and double bottoms[8].Successful TA is constructed on three basic principles [2]:Keywords— Forex, MACD, Technical analysis, FundamentalAnalysis, Indicator.I. INTRODUCTIONC. ProfitabilitySeveral studies support TA and revealed that TA offerssignificant financial signals [9]. In addition, the subsequentresearchers concur with this actuality; Sweeney (1986, 1988);Brock, Lakonishok, and LeBaron (1992); Blume, Easley, andO’Hara (1994) ; Neely, Weller, and Dittmar (1997); Chan,Jegadeesh, and Lakonishok (1996, 1999); Gencay (1996,1998, 1999); Brown, Goetzmann, and Kumar (1998);Rouwenhorst (1998); Neely and Weller (1999); Chang andOsler (1999); Lo, Mamaysky, and Wang (2000); Chan,Hameed, and Tong (2000); and Hsu and Kuan (2004) [10-19].Their findings imply the popularity of TA over FA is due tothe fact that the former can “beat the market”.Moreover, (Papadamou and Tsopoglou, 2001) indicated thatTA approach can generate higher profit against a simple “buyand hold” strategy which is a fundamental analysis [20]. Induring on 8 years from 1989 until 1996 for finding out whetherTA is profitable, they tried to evaluate USDDEM andUSDGBP in their study. In addition, Lui (1998) stated thatmore than 85% of Forex traders in Hong Kong used bothtechnical and fundamental analysis to predict future pricemovements; however, they believed that TA is more helpfulthan FA in forecasting the trends [21].USING currencies in trading commenced in 1973 afterbreaking down the Bretton Woods agreement based onwhich the value of currency was underpinned by the goldowned by the central bank. Forex is a free market that definesthe prices of currencies based on the supply and demand of aparticular currency [2].Compared to other financial markets, the Forex market hasfollowing benefits: 24-hour operation 5 days a week, an overthe-counter market, and no fixed location. Moreover, Forexmarket produces daily volume of USD 3.2 trillion that makes itas the biggest financial market [3]. Since, there is no limitationby the central bank for issuing the currencies, any currency canbe traded [4]. According to Ding et al. (2010), quicktechnological changes have increased the effectiveness ofForex transactions and allowed the market to grow faster byovercoming geographical restrictions as well as decreasing thecosts of entry and transactions.A. Fundamental Analysis in Forex TradingThe best way for determining asset valuation based on keyunderlying factors is fundamental analysis (FA). SignificantSeyed Hadi Mir Yazdi is Faculty of Business and Accountancy(FBA),University of Malaya (UM) Kuala Lumpur, Malaysiahadi.miryazdi@gmail.comZiba Habibi Lashkari is with International Business School (IBS),University Technology Malaysia (UTM) Kuala Lumpur, MalaysiaZiba.habibi.L@gmail.com.II. INDICATORSThe mathematical calculations based on currenciesinformation such as volume and prices (opening, low, high and159
International Journal of Humanities and Management Sciences (IJHMS) Volume 1, Issue 2 (2013) ISSN 2320–4044 (Online)closing) with a specific formula called indicators. TOforecasting future price changes can use from the value ofresult. They are used to offer more information about marketto be applied by the investors in decision making. Indicatorsbased on their functions are sorted to four groups; trendindicators, volume (strength) indicators, volatility indicatorsand momentum indicators as follow [6].the underlying security. Moreover, using Exponential MovingAverages (EMAs), opposite to Simple Moving Averages(SMAs) can remove some lags.MACD as a momentum indicator can predict the moves in theunderlying security. MACD divergences are basic elements inforecasting a trend alters. A Negative Divergence signal whichbullish momentum is waning and a change in trend frombullish to bearish is possible, too. It warns the traders to takebenefits in long positions or for violent traders setting off ashort position.Another advantage of MACD is its application in daily,weekly or monthly charts. In this regard, the divergence andconvergence of two moving averages will be shown by theMACD. Although, the standard setting defined for the MACDis the difference between the 12 and 26-period EMA, anycombination of moving averages can be applied. In addition,the set of moving averages to be applied in MACD can bechanged for each individual security. For example, a faster setof moving averages may be suitable for weekly charts. On theother hand, slower moving averages may appropriate to helpsmooth the data for volatile stocks. Regarding this flexibility,the MACD can be adjusted to the trading style, risk toleranceand objectives of the traders.A. Trend IndicatorsExplain continue to move in one direction in the exchangerate over time, called a trend. Trends have three directions;sideways, down and up. Trend indicators level variable ratedata to produce a mix of market direction. There are someTrend Indicators for example Moving Averages (MA),MACD, P-SAR and Trend lines.III. MACDThe MACD (Moving Average Convergence/Divergence) isin category of trend indicators which shows relationshipbetween prices and moving averages. The MACD wasintroduced by Gerald Appel, in 1970s. It is the differentbetween exponential moving averages for 26 and 12 days.There is a plot of another exponential average for 9 dayswhich is placed on top of the MACD to indicate long/shortopportunities; it is called “trigger” or “signal” [22].The MACD is very simple to calculate; the differencebetween exponential moving averages for 26 and 12 days.There is a plot of another exponential average for 9 dayswhich is placed on top of the MACD to indicate long/shortopportunities; it is called “trigger” or “signal” (Appel, 2008).Interpretation of MACD is easy to be used for traders. Inthis study whenever the MACD crosses the zero upward, itmeans there is a buy opportunity while if the MACD crossesthe zero downward, there is a sell opportunity as shown inFigure 3.4. On the other hand, when the value of MACD in thefirst period (hour) is less than zero and in the second and thirdperiods is more than zero, there is a buy signal in fourthperiod. While, when the value of MACD in the first period(hour) is more than zero and in the second and third periods isless than zero, there is a sell signal in fourth period.IV. SCOPE OF THE STUDYIn this study real data of trading on hourly basis and for 10years from January 2001 to December 2010 is used. This setof data with numerous transactions will produce more reliableresults. The present study is aimed to assess the majorindicator to forecast the right time for buy and sell in themarket in order to avoid lose and gain profits.In this study four currencies, namely, EURUSD, GBPUSD,USDJPY, and USDCHF are assessed with the employment ofMACD at which buy and sell signals are identified. The periodof the present study is ten years which is beginning fromJanuary 2001.The currencies in this study evaluated separately to avoidthe effects of one indicator on the other’s result. That is, foreach currency the indicator applied and examined separately.Hence, there are four currencies and one indicator andcombination of them are called traders. Accordingly, each oneof the four virtual traders works only with the indicator andcurrency.V. METHODOLOGY, DATA ACQUISITION AND ASSUMPTIONSThe present study is developed based on reviewing relatedliterature as mentioned in previous section. This sectionsummarizes the research design of this study. Figure 2illustrates the methodology of the study to reach the definedaims.The data needed for this study are hourly opening, closing,high, and low prices as well as trade volume for fourcurrencies within 24 hours a day of weekdays started fromJanuary 2001 till December 2010. The data are collected fromonline data base of Foreign Exchange Market on MetaTradersoftware.Fig. 1 4 Buy and sell signal from MACD indicatorA. MACD advantages and PropertiesOne of the basic advantages of MACD is its potential toincorporate the aspects of both trend and momentum in asingle indicator. As a trend-following indicator, MACD willnot be erroneous for too long. Applying moving averagesconfirm that the indicator will finally follow the movements of160
International Journal of Humanities and Management Sciences (IJHMS) Volume 1, Issue 2 (2013) ISSN 2320–4044 (Online)indicator was calculated by the evaluated data. By usingunique formula in VHTS and default assumptions suggestedby its inventor, the indicator was calculated. Besides, allformulas and assumptions were rechecked to avoid anymistakes in VHTS. Furthermore, to make sure that the resultsare reliable, the software has been run several times. It helpedus to answer the second research question: what are the hourlyvalues of the selected indicators for each currency?.VI. DATA COLLECTION AND ASSUMPTIONSAfter computing and interpretation of MACD indicator,VHTS provided the results as shown in Table 1. Even thoughthe results are different for each currency, it is considerablethat the circumstances of all currencies for using MACD arethe same; trading with the same assumptions andinterpretations. Moreover, the results indicate MACD is not asuitable indicator for these currencies with applying itsinterpretations considering this study’s assumptions. However,application of MACD for EURUSD is more profitablecompared to other currencies since it generated 182 pipsprofit. Although, this profit could not increase the capital dueto time which it is created.Table I demonstrates results of implementing MACD forfour different pair-currencies which are shown in four separatecolumns. First three rows are showing produced profit that issplit to two parts, sell and buy profit. The same thing isdisplayed for loss in second three rows. The third three rowsare demonstrating total profit/loss and its sell and buy division.Fourth three rows are showing the number of sell and buytransactions and total number of transactions for each paircurrency. Finally, the last three rows are displaying endingbalance, last trading date and paid commission to broker.In this study following assumptions are formulated to combinetwenty conditions of traders. Accordingly, each trader wasprevented from any distractors of the results. The assumptionsare formulated based on the experiences of the researcher inForex market, studying Forex market, capital management,and risk management. Trading period is considered for ten years (2001-2010),since, shorter period generates unreliable results and longerperiod makes data processing complex and difficult. Only one of the four pair currencies, namely, EUR/USD,GBP/USD, USD/JPY and USD/CHF can be traded by thetraders. The reason for choosing these currencies is Oh’s(2007) viewpoint that theorized European, North Americanand Japan Forex market are more efficient than otherforeign exchange markets and in its turn it helps to removeother variables’ effect on results. Only one position can be opened by the traders at the sametime and once the new order is offered, the earlier one willbe closed. In 30 pips each order can take profit and stop loss. It makesthe profits small and decreases the risks of losing largeamount. The order amount should be less than 7% of the traders’capital balance. It reduces For each trader the primary capital is 10,000.Fig. 2 The research process flow diagramThe data are transmitted to spreadsheets with 60,000 rowsfor each currency. Frequency is hourly for the time period of2001-2010. An illustration of data on MetaTrader software isoffered in Figure 3.The data then analyzed and processed inorder to answer the first research question: what are thevolume and open, high, low and close prices for each currencyin hourly basis for the years 2001 -2010.Fig. 3 An example of the data on MetaTrader softwareMetaTrader as Forex trading online software that is usedextensively by foreign exchange traders is one of thesignificant tools used in this study. Buying and selling isfeasible via this software for traders. MetaTrader has providedgraphs and charts of the indicator to facilitate traders’activities.Microsoft Excel software is another tool applied forprocessing and analyzing the data. Regarding to the fact thatcalculations are based on each item as well as great volume ofdata, Virtual Historical Trader Software (VHTS) is developedbased on Microsoft Excel. VHTS uses assumptions and tradebased on them on historical data. In addition, TA-Lib programis added to Excel to increase accuracy of calculations byMicrosoft Excel.VHTS is provided to create a virtual situation like the realtrading circumstances for investors by applying theassumptions. VHTS is able to compute indicator for eachperiod of spreadsheet or each row based on the data.Moreover, sell and buy orders can be opened and closed basedon signals and assumptions generated by the indicator. Finally,profit or loss for each/all order can be calculated by VHTS.In order to evaluate the effectiveness of using SAR indicatorapplied on four currencies, empirical method has been applied.To ensure that the data are required ones, historical datacollected from Meta Trader software were evaluated. Then, the161
International Journal of Humanities and Management Sciences (IJHMS) Volume 1, Issue 2 (2013) ISSN 2320–4044 (Online) The time for trading is upon receiving the buy or sale signalfrom the indicators and it is 24 hours a day per 5 days aweek. In case there is no new order or a position do not attain thelevel of take profit or stop loss, after 10 hours the orderautomatically will be closed; hence, profit or loss will becalculated based on the last 10 hours. No restriction has been considered for each order, because itis only 7% of the capital balance. The least amount of the order is 0.01 of the lot.Fig. 5 Final percentage of EURUSD buy and sell using MACDindicator for the years 2001 to 2010The ordering did not stop during 10 years period of thisstudy which show the capital could reach to end of project.Moreover, the final profit generated by buy orders is 1706 pipswhich is resulted from 13165 pips profit and 11459 pips losswhile the final loss created by sell orders is 1524 pips which isresulted from 11259 pips profit and 12783 pips loss. Theprofit resulted from buy orders is more than loss from sellorders and covered it and has extra 182 pips profit. This profitgenerated by 1524 pips loss from sell transactions and 1706pips profit from buy orders.The more detail results of using this indicator for EURUSDis given in Table II and as it is clear from the Table, 183 pipsprofit created within first 10 years.TABLE ISUMMARY OF THE FINAL OUTCOMES USING MACD INDICATOR AND ITSRELATED INTERPRETATIONS FOR THE YEARS 2001 TO 2010The spread or commission of the broker is based on realmarket rate. However, this rate is different for every currencyand time of the day. For example, the broker’s commission forEURUSD and USDJPY currencies is one pip at 8 am to 8 pm,while it is two pips at 9 pm to 7 am. For GBPUSD andUSDCHF currencies the broker’s commission is two pipswhile it is four pips at 9 pm to 7 am.TABLE IIYEARLY OUTCOME OF TRADING EURUSD USING MACD INDICATORVII. PROCESSResults and discussion of the study are presented based onapplied methodology; that is, data collection, data assessment,data processing, and computing P-SAR by application ofVHTS. Then, by interpreting the indicator for the fourcurrencies EURUSD, GBPUSD, USDCHF and USDJPY, buyand sell signals have been determined. Afterward, based on theassumptions, proper trading software has been run to gainprofit or loss of each currency regarding indicator application,therefore there are four virtual traders.In most of years the buy transactions generated profit whilesell transactions resulted loss. Moreover, the MACDinterpretations made profitable signals in five years while thereis loss in four years and one year is neutral. Moreover, Table4.8 shows MACD is producing more profitable buy signalscompared to sell signals. However, the last result is positiveand show profit but it could not add money to its capital due tothe time of generation. It means at the beginning of the studyperiod the amount of capital is full and since each order is 7%of capital balance, the amount of order also would be big.Therefore, the loss or profit for beginning of study time areawould be bigger compare to end of study period. Since at thefirst MACD made loss the next generated profit had lowercash generation even their pips of profit are higher than theirprevious pips of loss.A. EURUSDWith the employment of MACD for EURUSD in order toidentifying the signals to enter and exit the market, 1899orders include 955 buy orders and 944 sell orders has beenproceeded. Total numbers of buy and sell of EURUSD withthe employment of Moving Average Convergence/Divergence(MACD) indicator during ten years (2001-2010) is presentedin Figure 5.B. GBPUSDThere are 1856 transactions including 926 buy and 930 sellorders which are created by employment of MACD indicatorfor GBPUSD which continued trading until end of study timescale. Total numbers of buy and sell of GBPUSD with theemployment of Moving Average Convergence/Divergence(MACD) indicator during ten years (2001-2010) is presentedin Figure 6.162
International Journal of Humanities and Management Sciences (IJHMS) Volume 1, Issue 2 (2013) ISSN 2320–4044 (Online
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