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1 You have downloaded a document from The Central and Eastern European Online Library The joined archive of hundreds of Central-, East- and South-East-European publishers, research institutes, and various content providers Book: Location: Author(s): Title: URL: Czech Republic Andrea Kolková Entrepreneurship on the Financial Markets Based on the Selected Indicator Technical Analysis Entrepreneurship on the Financial Markets Based on the Selected Indicator Technical Analysis

2 ENTREPRENEURSHIP ON THE FINANCIAL MARKETS BASED ON THE SELECTED INDICATOR TECHNICAL ANALYSIS Andrea Kolková Abstract Purpose: Entrepreneurship on the financial markets is currently associated with a lot of innovations. Financial managers are not limited in cash flow planning only by traditional instruments such as stocks or bonds. For effective use of modern tools, it is necessary instruments to predict courses. Possibility is a technical analysis. The aim of this paper is the application of the Parabolic Stop and Reversal indicator on today's FOREX and detection whether prediction of growth or decline of the currency pair according to this indicator is effective, so it could be used for more efficient planning of entrepreneurial finance. Design/methodology/approach: EUR/USD currency pair has been chosen for the analysis. The currency pair will be tested at the selected time frame form. The effectiveness of selected technical Parabolic Stop and Reversal indicator will be tested with the use of digital options. Findings: Paper evaluates the effectiveness of selected technical indicator. It applies theoretical knowledge about the Parabolic SAR indicator on the FOREX market and in particular on the EUR/USD currency pair. The result is, whether the number of profitable trades made under the impetus of the trading system based on this indicator is greater than the number of losing trades in a given time frame. Research/practical implications: In the case of confirmation of the effectiveness of this indicator it is suitable for practical applications in trading FOREX. In subsequent research, it is possible to verify whether this indicator is also usable on other contemporary markets, such as equity markets, futures. Entrepreneurs and the traders can use this tool to manage their available funds. Originality/value: Researches focus primarily on well-known indicators as weighted averages or MACD. Parabolic SAR indicator is in theory generally poorly described and defined. Today, it is increasingly difficult to store the available funds efficiently and therefore may benefit from any new tools for the structure of entrepreneurial finance. Keywords: Parabolic Stop and Reversal indicator, FOREX, Digital Option JEL Codes: G14, F31 426

3 Introduction Businesses in the financial markets are currently enjoying great prosperity. Entrepreneurs do not already impose available funds on futures accounts or other bank products, as in the recent past. To insert available funds in a profitable banking product is almost impossible today. Therefore, many business owners and financial managers allocate funds on the capital market. There is treasury management which deals with a strategic as well as operational management of cash. According to research by Philips (1997) even before the financial crisis, the interest in information from the area of capital markets in managing corporate finances, was the second highest. Table 1 provides results from a Treasury management association survey of the informational needs of the treasury profession. The areas were range on a seven-point scale, with 1 is very low and very high 7 informational needs. Tab. 1: the informational Leeds of the treasury profession Source: Phillips, A (1997) Nowadays, financial markets are no longer only for "big players" at all, as stated by Kisela (2015). Also small investors and traders have strong presence. It creates a new group of small to medium-sized entrepreneurs, whose business is based on speculation on financial markets, particularly on FOREX. Entrepreneurship is usually realized either from its own funds, which are usually mixtures released from another business or based on the appreciation of clients free funds. To find the best strategy for the business, which would provide a permanent 100% profit is impossible. There are naturally very few publications, which would indicate successful strategies. As reported by Petrov and Tribelsky (2015) "it is explained by obvious commercial importance of such results. It is difficult to imagine a person, who has succeeded to build up such a strategy and then published all details in a scientific paper. Moreover, if such a person appeared, he/she immediately would have received a lot of followers, whose action in the 427

4 market would change its dynamics, so that, eventually, the developed algorithms would stop working. The interest in finance has been also growing among consumers, as proved, for example, by researches Koraus at all (2016). 1 Methodology This paper analyzes the strategy based on the Parabolic Stop and Reversal (SAR hereinafter). After analyzing the separate indicator there has been applied a trade filter and a Moving Average Convergence/Divergence indicator (MACD hereinafter). Indicator and subsequently the filter were applied to data from the FOREX market. Specifically the currency pair EUR/USD was subjected to analysis. The values of the EUR/USD were used based on the daily time frame. Data were analyzed on annual frequencies and for the past 10 years. Generally values have been subjected to analysis. The data source for this analysis was the program Metatrader 4 (MT4 hereinafter), which is currently the most widely used program, not only for data acquisition, but also for the small business entrepreneurs. The obtained data was formatted in OHLC together with the traded volume. To calculate efficiency strategy Excel program was used including the instrument TA-Lib Pro Excel. The resulting, which were quantified from assembled trading systems, have been applied to digital options with three-day expiration, with the following logic: A digital up option is considered a buy signal and a digital down option is the sell signal. In the current period the digital options are in the rate of return of 85.01% (for example, a broker XTB on the Basic Account). Based on this measure the total profits of the trading system are then calculated. 1.1 Parabolic Stop and reversal ( SAR hereinafter) Parabolic SAR is a typical following indicator. The author of an indicator is W. Wilder (Wilder, 1978) in his book New concepts in technical trading systems. Parabolic system is not formed by a curve, as is the case of MACD, but by a series of points corresponding to each time frame. The indicator can be written using the formula, = + ( ), where SAR0 is the point value of the indicator for the given time frame, SAR-1 is the point value of the indicator for the previous time frame, α is the acceleration coefficient, Pex is the maximum rate recorded during the current trend. 428

5 Acceleration coefficient is a unique instrument and determines how fast the values are changing in the direction of the trend. The basic setting is suitable for a minimum growth level of 0.02 and the maximum value should not exceed 0.2. The system can be set even more responsive by reducing the acceleration coefficient. On the contrary, by its increase it is possible to achieve a slower system response to changes in the exchange rate. In practice the acceleration coefficient ranges from to in its low and from 0.18 to 0.23 in maximum size. In this paper, the basic version of the accelerator is used. Business system then indicates entry into a long position when the points of SAR begin under the value of EUR/USD. In the case they begin above the values, it is an impulse for sale. Examples of to buy and sell are in figure 1. Fig. 1: Examples of 1,17 1,16 1,15 1,14 1,13 1,12 1,11 1,1 1,09 1,08 1,07 1,06 sellsignal sell signal sell signal buy signal buy signal buy signal Parabolic SAR EUR/USD Source: own calculations 1.2 Moving average Convergence/Divergence MACD is one of the most widely used indicators at all. In the basic version, which is also used in this paper is the difference between the 26-day and 12-day Exponential moving Average (EMA hereinafter). Along with thus obtained MACD curve is still necessary to draw a 9-day curve EMA, which is called signal curve. EMA indicator can be calculated based on the relationship, EMA P1 K EMA0 (1 K ), where K 2 N 1, where 429

6 N is the number of days to quantify EMA, P 1 is today's course and EMA 0 is yesterday's EMA value. The trading system chosen here then relies on the crossing of the oscillatory curve with the MACD curve. If MACD crosses the signal curve from the bottom it is a signal to buy EUR/USD if conversely, to sell. If the MACD rises above its zero level oscillation, this movement, as stated Veselá and Oliva (2015), a change from bear to bull trend and conversely. Intersecting the oscillating line above is a signal to buy down option, otherwise it is a signal to purchase option up. 1.3 Digital (binary) option As stated by Rick Thachuk (2010) "binary options have, for some time, been available over the counter but they are typically marketed as exotic options to institutions and often packaged with other derivative-type products." In the US, the retail customer had to wait until mid-2008, when the American Stock Exchange and Chicago Board Options Exchange listed binary options on select stocks and indices. However, these have not attracted any significant retail customer base. However, according to Jaworsky (2006) first binary options were introduced by CBOE at a press conference on 10 July 2006 as one of his main financial innovations. Although the first trades were executed on the exchange CBOE, today the vast majority is carried out on the Over the counter market (OTC hereinafter). OTC method of trading presents the market participants who trade directly together. In practice, one of the brokers is the counterparty of majority of the trades. Due to its simplicity, digital options have become very popular especially among small businesses. Digital options are twofold up and down. In the case of buying up the option speculates on the growth of the underlying asset, in this case the growth of the EUR/USD currency pair by one pip and more. When buying down option, we are speculating on the decline, the system is effective in case of a fall by at least 1 pip. At digital options it is known in advance not only the amount of prices but also the rate of return, which may vary for individual brokers. In this paper there was used the rate of 85.01% (for example, at a broker of XTB brokers). 430

7 1.4 The volatility of the currency pair The volatility of the currency pair in this contribution was calculated using a variable dispersion, which can be according to Hindels at all (2007) defined as the average of the squared deviations of individual values from their arithmetic mean, therefore, n 2 i x 1 n x x i 2, where X is the exchange rate of a currency pair at a specified time, it is the median rate. For the disadvantage of interpretation, there is further used for the final evaluation the standard deviation, which is the square root of the variance. 2 Results On the selected data there was applied a trading system, initially based solely on the Parabolic SAR indicator, later also in conjunction with the MACD filter. The data was tested in annual frequencies. 2.1 Volatility For SME s are preferable currency pairs with lower risk, especially for low volumes of funds invested. As has already been defined for assessing the volatility of currency pairs it is preferable to use a coefficient of variation, not just the standard deviation, or variance alone. For this reason, the best currency pairs are those with the lowest coefficient of variation and these are mainly: GBP/USD, EUR/GBP, EUR/JPY, USD/JPY. Tab. 2: Volatility currency pairs Major FIX Coefficient Variance Standard deviation Mean value of Variation AUDUSD 0, , , ,78% EURCHF 0, , , ,12% EURUSD 0, , , ,08% EURJPY 249, , , ,18% EURGPB 0, , , ,15% GBPUSD 0, , , ,11% NZDUSD 0, , , ,12% USDCAD 1, , , ,82% USDCHF 1, , , ,21% USDJPY 11546,27 14, , ,05% Source: own calculations 431

8 According to the portal finance.cz (2017) absolutely dominant element is the US dollar, which is present in 86% of all transactions on the Forex and over 90% of all trades include the US dollar, euro, Japanese yen, British pound or Swiss franc. Even the most widely used currency pair is the EUR/USD, which was used in this article and in particular for SMEs make up the largest number of trades. 2.2 The trade system Parabolic SAR Using Parabolic SAR indicator there was observed 7 profitable years out of 12, the remaining 5 reached losses as shown in Table 3. Tab. 3: Results of the trade systém Parabolic SAR Source: own calculations Parabolic SAR total profitable lossy ending profit profit with transaction costs ,006-0, ,0179 0, ,0136 0, ,0232-0, ,0335-0, , , , , , , , , , , , , , , total profit/ , , mean value 17, ,5 9, , , variace 9, , , , , standard deviation 3, , , , , Reached loss, however, was higher than the profit of 7 successful years, so overall it was a loss of 129 pips before counting transaction costs. After taking account of transaction costs it is the loss of 106 pips. The year of 2017 does not naturally contain trades from all over the season, but only to 13.3, therefore, they may be described as incomplete. If the statistics include full year 2017, we will get a profit of 176 pips, respectively 144 pips after counting transaction costs. Standard deviation from mean variance was with transactional cost 1.5%. 432

9 2.3 The Parabolic SAR with MACD filter When using the Parabolic SAR indicator, along with a filter, which was voted one of the most widely used MACD indicators, the results are different. As can be seen from Table 4 the number of transactions was significantly reduced. When using the indicator alone, system could trade up to 211. When using a filter indicator, the number of transactions declined to 20, while indicator MACD separately initiated 81. Of the 20 provided 13 were profitable, which represents 65% of profitable trades. Tab.4 : Results of the trade systém Parabolic SAR with MACD Source: own calculations Parabolic SAR+MACD total identical profit with transaction costs MACD profitable lossy ending profit ,0121 0, ,0042 0, ,0015-0, , , ,0282 0, , , , , , , , , total profit/ , , mean value 1, , , , , variace 2, , , , , standard deviation 1, , , , , Business system based on the Parabolic SAR indicator and MACD filter showed a profit in the whole period in 10 out of the 12 monitored years. In 3 years there have not been used any trades. The total profit thus amounted to 310 pips, with the inclusion of transaction costs of 254 pips. It is therefore possible to describe the trading system as functional. Conclusion and discussion The results clearly show that for SME s is preferable to use Parabolic SAR indicator with MACD filter. There are less resulting to effect transactions than when parabolic SAR used alone. However, their profitability is higher. Ambiguity of the profitability based on the 433

10 parabolic SAR without a filter, you can confirm and research and Mir Lashkari Yazdi (2012), which were used years Supreme profits using this trading system were reached in 2011, and it 0,0231 pips with transactional costs. In contrast, the lowest profit could have been achieved using the currency EUR/USD in Business system provides a total of 65% profitable trades, by appropriate selection of money management can be the system SME's definitely recommended. An analysis of volatility like that, of the major currency can be recommended for SME's mainly couples GBP/USD, EUR/GBP, EUR/JPY, EUR/CHF, USD/JPY, USD/CAD, or are utilized EUR/USD. Acknowledgment The article was written within the project GAAA 21_2 / 2016 New business opportunities on the financial markets. References Achelis, S.B. (2001) Technical Anaysisi from A to Z. McGraw-Hill. Forex a nejvíce obchdované měnové páry. (2017). Finance.cz. [ONLINE] Available at: [Accessed 20 March 17]. Hindels R., Hronová S., Seger J., Fischer J.(2007). Statistika pro economy. Professional Publishing. Koraus, A., Dobrovic, J., Ključnikov, A., Journal of Security and Sustainability Issues. Consumer Approach to Bank Payment Card Security and Fraud, 18(3). Kysela, P. Virdzek, T. Vajda, V. Trading the equity curves. In: Procedia Economics and Finance 32: , 32, doi: Lashkary, Z.H., Mir Yazdi, S. H. (2012). Technical analysis of Forex by Parabolic SAR Indicator. International Islamic Accounting and Finance Conference Phillips, A. (1997). Financial management. Treasury management: Job responsibilities, curricular development, and research opportunities, 13(12). Petrov V. Y., Tribelsky, M.I. (2015). Forex trades: Can the Takens Algorithm Help to obtain steady profit at investment reallocations?, JETP letters, (12), Pleiades Publishing. 434

11 Veselá J., Oliva M.(2015) Technická analýza na akciových, měnových a komoditních trzích. Ekopress Contact Andrea Kolková College of Entrepreneurship and Law Vltavská 585/14, Praha 5 Smichov, Czech Republic andrea.kolkova@vspp.cz 435

TESTING EMA INDICATOR FOR THE CURRENCY PAIR EUR / USD

DOI: 10.1515/ijek-2017-0003 TESTING EMA INDICATOR FOR THE CURRENCY PAIR EUR / USD Andrea KOLKOVÁ 1 College of Entrepreneurship and Law, Prague, Czech Republic ABSTRAKT The aim of this paper is to verify