Trading
FIN 6367 – International finance Individual portfolio simulation Page 1
University of Houston-Victoria
School of Business
FIN 6367 International Finance
Dr. Xavier Garza Gómez
Fall 2014
Technical analysis of currencies
This project is individual
Type of project: optional. Students may choose to
do this project in order to get extra credit.
This project can earn the
student up to 5 points.
Objective:
Practice the use of technical
analysis tools by trading
with a simulated FX account.
Instructions
Each student will create an account at fxcm.c
om or oanda.com. Simulation accounts from other
websites will be allowed but students will be resp
onsible of getting the information before the
account expires.
Students can use any currency pair available in
the website where the simulation account is
created. Students will analyze a minimum of 10
charts. The charts must be included in the
trading log that will be submitted for grading.
A minimum of 5 trades are expected. Students
may have to analyze more than 10 charts if
the analysis doesn’t pr
oduce enough trading signals.
Time interval(s) to be used in
the decision is determined by the i
nvesting style that students want
to test (try). Students can c
hoose Daily graphs, 4-hour graphs,
hourly graphs or even shorter
intervals (15-minutes, 30-minutes).
Multiple intervals are allowed.
Daily or 8-hour intervals are
strongly
recommended to minimize
time spent in front of the computer screen.
Each trade must be started on a differe
nt day and must be justified with
at least 4
technical
conditions. Closing trades manually must also be
justified. Two or three signals must reverse in
order to close the position. Conservative students
can close trades when 1 technical signal
reverses.
Students will fill the trading log fo
r each chart they analyze regard
less if it produces a trade or
not. They will be evaluated on the discipline shown
for trading. That is, as long as there are 4 (or
more) documented technical signals indicating a tr
end, a trade will be valid and count against the
requirement regardless of the profit/loss obtaine
d. You must copy the chart where you observed
the signals into the trading log (see example)
FIN 6367 – International finance Individual portfolio simulation Page 2
Basic tools that you must use:
Moving averages
A fast, a medium and a slow
moving average are defined.
Short term traders can use (5, 8, 13) or (5, 10, 20)
Medium term traders and long
term traders can use (10, 20, 50
), (20, 50, 100) or (50, 100, 200)
The recommended colors for the 3 MA lines are
Green for the short term, Red for the medium
term and Blue for the Long term.
Simple rules for trading:
Upward trend:
If Price > Fast MA then
you get 1 up signal (+1)
If Fast MA > Medium MA then you get 1 up signal (+1)
If Medium MA > Slow MA
then you get 1 up signal (+1)
Downward trend:
If Price < Fast MA then you get 1 down signal (-1)
If Fast MA < Medium MA then you get 1 down signal (-1)
If Medium MA < Slow MA then you get 1 down signal (-1)
Based on the possible combinations of th
ese 3 lines we have 4 possible results:
3 up signals: Clear upward trend.
1 up signal: Weak upward trend.
1 down signal: Weak downward trend.
3 down signals: Clear downward trend.
MACD
Moving average convergence divergence
This tool uses 2 MA lines and one histogram to
determine the trend: The default parameters are
set to 12, 26 and 9.
The most commonly used signal is:
If histogram is positive th
at is an up signal (+1)
If histogram is negative,
that is a down signal (-1)
A secondary signal that is used sometimes is
whether the MACD lines are above or below 0.
If the lines are above 0, it
confirms an upward trend
If the lines are below 0, it confirms a downward trend.
For the purposes of this exercise, only the histogr
am is required. The MACD lines can be used as
an additional confirmation.
FIN 6367 – International finance Individual portfolio simulation Page 3
RSI
Relative strength index. The default
parameter is typically 13 or 14.
There are two ways of using this signal:
Trend identifier:
If RSI >50, there is an
upward trend (+1)
If RSI <50, there is an downward trend (-1)
This indicator is also use
to generate buy/sell signals
If the RSI exceeded 70 in recent periods, a sell signal is generated when RSI falls below 70.
If the RSI fell below 30 in recent periods, a buy signal is generated when RSI goes above 30.
The rationale behind these recommendations
is based on the overbought/oversold concept.
For the purposes of this exercise
, only the 50 rule is required.
The overbought and oversold
signals can be used as addi
tional checks for the trades.
Assessing the strength of the trend
Students must add the positive signals and the negative signals. Then they will get a “NET”
direction. If 5 signals are used
then the possible results are
+5 strong upward trend
+3 moderate upward trend
+1 neutral trend with positive bias
-1 neutral trend with negative bias
-3 moderate downward trend
-5 strong downward trend
If the trend is moderate or strong the next step
is to use the ADX to assess the attractiveness of
the trend. As a general rule, if the ADX is lo
wer than 20 the trend is
not attractive enough and
the trader should wait until there
is enough proof that the trend is
really strong enough to produce
a profit. We can expect that the majority of th
e time, the trends will no
t be attractive enough to
enter them
Additional indicators
Support/resistance (refer
to the PDF file labeled “Introduction to Technical
Analysis”
Sell at resistance / buy at support.
These are valid technical signals.
You have to specify the time interval and
the level of support/re
sistance identified.
Students are free to use any technical oscillator
they are familiar with (Oscillators, Bollinger
bands, ADI, Elliot waves, Fibonacci, etc) as
long as they clearly state the condition on the
trading log.
