Technical analysis : same for forex and stocks? : a combined signal approach to technical analysis on U.S. stocks and foreign exchange markets

Abstract

The predictive power of technical analysis is widely debated across the financial world. While the vast majority of traders vouch for its ability to consistently outperform the market, the need for innovative and unique research remains highly in demand. For this reason, this study aims to shed light where technical analysis is more effectively deployed, either in equity or foreign exchange (“forex”) markets. Using historical research as the groundwork for this study, volatility is tested on both the equity and forex markets in contrasting measures. Scenarios of high volatility are looked at by means of the EUR/RUB currency pair and the Russell 2000 equity index, while the EUR/USD and S&P 500 index represent the more stable data. Long-Only and Long/Short approaches are applied on the various technical trading strategies, each adhering to their respective trade signals triggered by the technical indicators under study. Through a series of interviews, this research delves deeper into the subject by observing the extent of the use of technical analysis by practitioners in Malta. The back-tested model provided the conclusion that technical indicators were more likely to beat the buy-and-hold strategy in the forex market than in the stock market. Despite this, the qualitative study found that practitioners favoured equities over currencies to apply technical trading rules.