Technical analysts have always manteined that one can forecast the future forex market movements by observing the market’s performance in the past. As a consequence, by using technical analysis it is possible to obtain extra-profits. The empirical evidence provided by economists on this topic does not always provide clear-cut results. Nevertheless, some studies provide possible answers about the validity of single forex trading strategies applied to single pairs. For example, a study by Alexandre Repkine of Konkuk University applied three technical charting rules to trading the world’s seven major currency pairs (EURUSD, USDJPY, USDCHF, NZDUSD, AUDUSD, GBPJPY and GBPUSD) to a variety of holding horizons and pattern fitting precision levels.
The author found two stylized facts about technical analysis that simultaneously demonstrate its potential for profitability and simultaneously the difficulty of its practical application. Repkine believes technical analysis rules are and have been popular since the share of profitable strategies exceeds one third of all strategies and is four times larger than the share of money-losing strategies. However, “the practical applicability of this finding is rather questionable since more than half of the technical strategies result in zero profits and the optimal type of technical indicator and holding horizon are not robust across currency pairs”, the study reveals.
What can we say then about the value of technical analysis, asks the researcher? Based on results obtained for a wide range of strategies both in terms of the technical indicators, holding horizons and the fitting statistic values, he concludes that “it appears to be impossible to unambiguously indicate a universally profitable strategy that would work for any currency pair in the sense that each currency pair seems to ‘prefer’ a specific technical indicator and holding horizon. Thus, the bull/bear flag trend continuation patterns work best with the USDCHF pair (75% strategies based on that pattern result in statistically significant positive profits) while it is best to use the simple ‘trend is my friend’ strategy in case of the NZDUSD. Besides, in most cases no technical trading pattern considered will result in profits statistically distinct from zero”. In other words, while it is difficult to demonstrate that technical analysis is always profitable, it seems there is no doubt that USDCHF bull/bear flag trend continuation patterns is a real profitable strategy.