Forex is the largest and most liquid financial market. But are there strategies able to generate constant abnormal returns in this market? Different theories, such as the Efficient (EMH) and Adaptive Market Hypothesis (AMH), allow for different conclusions regarding trading profitability. The aim of this thesis is to analyse the profitability of four Forex trading strategies based on technical analysis. The main assumption of technical analysis is that past volume and price patterns tend to repeat themselves and thus, enabling traders to determine profit opportunities. To cover a variety of technical indicators, three different strategies (Strategies 1-3) were filtered out of the literature and tested. These were used as a benchmark to a Self-developed Strategy, which is based on pattern recognition. All these strategies were backtested for high-frequency trading on three major currency pairs. The performance comparison was then based on indicators such as Mean Excess Return, Sharpe Ratio and Win Rate. The results prove the complex relationship between market efficiency and adaptive behaviour. Strategy 1 and Strategy 2 were both unprofitable. One reason can be attributed to low Win Ratios combined with negative mean daily returns. But Strategy 3, based on Bollinger Bands, and the Proposed Strategy showed encouraging profits. The high Win Ratios of around two-thirds were a decisive factor in the success of Strategy 3, while the Proposed Strategy was profitable above all due to positive reinforcement through leverage and strong risk management. However, when transaction costs were considered, the corresponding profitability fell sharply. The two hypotheses thus show that although there are short-term inefficiencies, the long-term behaviour of the markets, characterized by rare, sustained outperformance, stated by the EMH cannot be ignored. Practical implications for profitable trading strategies could be derived from the results. Factors such as the correct use of risk management, leverage and the right combination of technical indicators for the appropriate currency pairs and time frequency for a high predictive power, are of great importance.
Il mercato valutario, il più ampio e liquido tra i mercati finanziari, rappresenta un’interessante arena per strategie di trading. La possibilità che strategie di trading generino rendimenti anomali persistenti è oggetto di differenti interpretazioni teoriche, come quelle offerte dall'ipotesi di mercato efficiente (EMH) e dall'ipotesi di mercato adattivo (AMH), le quali conducono a conclusioni contrastanti sulla redditività del trading. La presente tesi analizza la performance di varie strategie di trading basate sull’analisi tecnica in condizioni sperimentali. L’analisi tecnica si fonda sull’assunto che modelli di prezzo e volume del passato tendano a ripresentarsi, consentendo ai trader di identificare opportunità di profitto. Dalla letteratura sono state selezionate e testate tre strategie di trading (Strategie 1-3) come benchmark, cui si aggiunge una strategia sviluppata ad hoc, focalizzata sul riconoscimento dei pattern. Le strategie sono state sottoposte a backtesting su tre coppie valutarie, con performance valutate tramite indicatori tra cui rendimento medio in eccesso, rapporto di Sharpe e tasso di vittorie. I risultati evidenziano una relazione complessa tra efficienza di mercato e adattamento strategico. Le Strategie 1 e 2 hanno evidenziato bassa redditività, mentre la Strategia 3, basata sulle Bande di Bollinger, e la strategia proposta hanno registrato profitti significativi. Un tasso di vittorie elevato (circa 60%) ha rappresentato un fattore critico per il successo della Strategia 3, mentre la strategia proposta si è distinta per redditività attraverso leva finanziaria e gestione rigorosa del rischio. Tuttavia, considerando i costi di transazione, la redditività effettiva si riduce notevolmente. Si conferma, quindi, che sebbene si possano rilevare inefficienze nel breve termine, nel lungo termine l’EMH rimane rilevante. Le implicazioni pratiche evidenziano la centralità della gestione del rischio, della leva, della scelta di indicatori tecnici, nonché l'importanza della scelta della coppia di valute e della frequenza operativa.
Profitability of trading strategies based on technical analysis in forex markets
MAGRI, ANDREA;KORING, LUCA
2023/2024
Abstract
Forex is the largest and most liquid financial market. But are there strategies able to generate constant abnormal returns in this market? Different theories, such as the Efficient (EMH) and Adaptive Market Hypothesis (AMH), allow for different conclusions regarding trading profitability. The aim of this thesis is to analyse the profitability of four Forex trading strategies based on technical analysis. The main assumption of technical analysis is that past volume and price patterns tend to repeat themselves and thus, enabling traders to determine profit opportunities. To cover a variety of technical indicators, three different strategies (Strategies 1-3) were filtered out of the literature and tested. These were used as a benchmark to a Self-developed Strategy, which is based on pattern recognition. All these strategies were backtested for high-frequency trading on three major currency pairs. The performance comparison was then based on indicators such as Mean Excess Return, Sharpe Ratio and Win Rate. The results prove the complex relationship between market efficiency and adaptive behaviour. Strategy 1 and Strategy 2 were both unprofitable. One reason can be attributed to low Win Ratios combined with negative mean daily returns. But Strategy 3, based on Bollinger Bands, and the Proposed Strategy showed encouraging profits. The high Win Ratios of around two-thirds were a decisive factor in the success of Strategy 3, while the Proposed Strategy was profitable above all due to positive reinforcement through leverage and strong risk management. However, when transaction costs were considered, the corresponding profitability fell sharply. The two hypotheses thus show that although there are short-term inefficiencies, the long-term behaviour of the markets, characterized by rare, sustained outperformance, stated by the EMH cannot be ignored. Practical implications for profitable trading strategies could be derived from the results. Factors such as the correct use of risk management, leverage and the right combination of technical indicators for the appropriate currency pairs and time frequency for a high predictive power, are of great importance.File | Dimensione | Formato | |
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https://hdl.handle.net/10589/230000