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立 政 治 大 學
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N a tio na
l C h engchi U ni ve rs it y
1. Introduction
The foreign exchange market is the biggest financial market in the world.
The average trading volume of the global foreign exchange market is over 5 trillion US dollars every day. Hence, the economics of exchange rates is one of the primary focuses of international economists. However, much literature and many empirical studies indicate that the prediction ability of traditional economic models is not significant. Technical analysis has been one of the popular tools for investors to conduct profitable trading strategies. Technical analysts attempt to forecast prices by the study of historical data, such as past prices, volume and other observables because they believe that history will repeat all the time. However, it has been a controversial topic whether or not technical analysis is effective in the long-term.
Fama (1970) demonstrates that technical analysis is useless and investors cannot obtain excess profits by using technical trading rules because the real market is weak form efficiency, which means all the information reflects on the price immediately. Many researchers agree with Fama (1970) and criticize that the profits obtained from using technical analysis cannot exist for a long time and do not have scientific basis. All the excess profits of technical analysis are just coincidental, because the same results will not happen repeatedly.
However, technical analysis did not vanish but came out with more and more trading rules since Hamilton (1922) proposed the Dow Theory. If technical analysis is useless indeed, then it would not be popular to this day.
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國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
Alexander (1961), Levy (1967), Sweeney (1986), Brock, Lakonishok and LeBaron (1992, BLL) , Hsu and Kuan (2005) all show technical analysis can produce excess profits, although many scholars still propose the opposite opinions and do not believe that technical analysis is useful.
However, much empirical research denotes that using technical analysis in foreign exchange markets is profitable and there are many traders who rely on these tools to make their strategies. For example, Taylor and Allen (1992) indicate that 90% of foreign exchange traders use technical analysis as their trading decision tools. Also, Levich and Thomas (1993) demonstrate that MA and filter rules conduct significant profitability on the currency market on BP,CD,DM,JY,SF. LeBaron (1996) shows that it was significantly profitable by using MA trading rules in the currency of DM and JY, except for the period of government intervention. Szakmary and Mathur (1997) denote that MA technical rules conduct significant excess profits in the currency market of BP, SF, JY, DM, and the profit rate is around 2.2 ~ 3.8%. Numerous empirical studies of technical analysis have also been carried out, particularly since the 1960s.
Although much literature denotes that technical analysis has significant profitability, it is not applicable to all the markets in the world. Lin (2007) demonstrates that the Foreign Exchange market is in weak form efficiency by using 11 currencies and 8 technical indicators, meaning that investors cannot obtain excess profits from the market by using these eight technical rules,
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國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
including MA, MACD, KD, SAR, MTM, DMI and channel. Also, Chuang, Lin and Kuo (2011) indicate that it is profitable using four popular technical rules in inter-day trading but not in intra-day trading with the exchange rate of NTD/USD.
As a result, I try to find some real traders in Taiwan’s exchange market in order to search if there are any other useful and popular technical strategies that have not been researched in the literature. The main purpose of this paper is to prove that some technical indexes that show positive performance still exist.
From my interviews with some of the real traders in Taiwan, I chose these two technical indexes as the topic of this paper for the following reasons. Lai Ruei-tong from SinoPac Bank utilizes Commodity Channel Index as an essential indicator to trade in stock markets and earns well profits by using this technical indicator. Also, Lin Benson, who works in Fu-wua Securities Investment Trust in Taiwan, applies William Index to Taiwan’s futures exchange markets and obtains excess profits sometimes. Furthermore, You Ying-hong, a manager at Yuan-ta Financial Holdings Company, adopts both Commodity Channel Index and William Index as trading signals in his investment portfolio. To conclude from the above three points of views, these two technical indicators might be efficient technical tools and worth further research. Hence, the main purpose of this paper is to extend and to enrich the earlier research on technical trading rules by applying Commodity Channel Index and Williams Index to the foreign exchange market in Taiwan.
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國立 政 治 大 學
‧
N a tio na
l C h engchi U ni ve rs it y
The remainder of the paper is organized as follows: Section 2 reviews the past literature related to using technical analysis in foreign exchange markets;
Section 3 shows the resource of the dataset and some statistics summary of this data; Section 4 demonstrates the technical trading strategies by using these two technical indicators; Section 5 presents the empirical results about the performance of these two sets of technical strategies; lastly, Section 6 concludes the results of this paper and outlines some other essential issues of the thesis for future research.
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國立 政 治 大 學