Future Research

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6.2 Future Research

Since the research has only been worked for around a year, the thesis is not able to cover all the perspectives completely and many materials or questions can be prospected further. There are some viewpoints that can be addressed on future research:

1. Utilizing White’s Reality Check (2000, RC) and Hansen’s Superior Predictive Ability test (2005, SPA) to exam the credibility of these two technical indicators

This research did not use any test to exam the credibility. Nevertheless, it is essential and necessary to increase reliability by applying some acknowledged tests to exam. White’s RC and Hansen’s SPA test evaluate trading performances as well as to account for potential data-snooping biases. White (2000) presents the testing procedure for whether a given model has predictive superiority over a benchmark model after accounting for data-snooping biases.

RC can be applied to test the profitability of the best trading rule. It tests the null hypothesis that the profits generated by the best trading rule do not exceed that of a benchmark strategy and give an estimate of the true and nominal p-values for the null hypothesis by means of bootstrapping simulations. Besides, SPA corrects two drawbacks of White’s Reality Check test and makes the test method more credible. Consequently, using these two methods to exam the technical indicators can be an issue for further research.

2. Consideration of transaction costs

This paper did not take transaction cost into consideration. However, much

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research indicates that transaction costs are key factors on executing trading strategies, which may completely change the trading results. The amount of transaction costs depends on trading frequencies and how much percent banks charge for trading. Hence, it will be a necessary topic to test the profitability of the trading rules after accounting for the transaction costs.

3. Mechanism of stop-loss and stop-gain

Much research demonstrates that trading strategies can perform much better by adding the mechanism of stop-loss and stop-gain. However, this paper did not set up the mechanism of stop-loss and stop-gain. In order to increase the returns from these two technical indicators, it is an available method to research more deeply and to examine the trading strategy with the stop-loss and stop-gain mechanism.

4. Combination of both technical indictors

Some literature also illustrates that applying different technical strategies in different times can obtain more profits. This paper utilizes only two trend-following trading indictors, so it might perform better by adding the range trading systems in consideration.

5. Consideration of more parameters

Past literature seldom records the methods to choose parameters and examines the effects on different parameters. Nevertheless, some factors that might play an important role in the formula of technical indexes are not considered. Consequently, further research can focus on this issue.

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6. Test out of sample data

All the tests in this paper are just focused on the sample data within 20 years. Nevertheless, the results might only be effective in this period of time.

Hence, to be more credible, future research can exam some data out of the sample and test the predictability of these two technical indicators.

7. Different exchange markets

Although these two indicators perform pretty well on the market of NTD/USD, it does not mean that they are not good indictors on other markets, such as GBP/USD, USD/CHF, EUR/USD, USD/JPY and so on. Especially, the exchange market in Taiwan were strict controlled by the government.

Consequently, taking these indicators to other exchange markets might conduct with different results.

8. Consideration of interest rates

One of the most common reasons for investing in exchange markets is obtaining the interest rates in different countries. However, this paper did not consider the interests each investments could obtain. For the purpose of making the results more realistic, it is necessary to calculate the interests all the investment could receive. As a result, future research can take the interests from all trading into consideration and make the return more authentic.

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