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FINC3014-无代写
时间：2023-10-19
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strategy!
A trading strategy report
BY: (470527498),
(490239919), (500152050)
FINC3014 Assignment
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
EMA Cross-Over Strategy
Why use the EMA?
The use of moving averages in technical analysis is a simple tool that can help identify trends over
specific time periods. The cross-over of different period moving averages can signal trend reversals
and profitable trading situations.
Our trading strategy will employ the cross-over of the 5, 20 and 50-period exponential moving
average (EMA) on a 15-minute chart as signals for entering and exiting trades. Due to the volatility of
financial markets, the EMA is a useful indicator for short-term trading as it gives more weight to
recent price action and decreasing weight to older data (Meyers, 1989). The market we recommend
this strategy to be implemented in is foreign exchange market due to its high liquidity and relatively
low fee structure in comparison to other financial markets.
Where to trade and what instruments?
Our strategy will be implemented in the FOREX market, a global decentralized OTC market used for
trading currencies. This decision is attributed to the market’s extreme liquidity coupled with low
transaction costs, in comparison to other financial markets, allowing for small changes in price still
resulting in profitable trades. For the purpose of this brief, we have chosen AUD/USD and EUR/USD
as the currency pairs to be traded. All our trades are recommended to be placed on MetaTrade4
One of the key instruments of FOREX trading is leverage, which allows us to borrow funds in order
to increase one’s trading position. Profitable positions are able to be realized with large trade sizes
through leverage in conjunction with small price changes. However, leverage is said to have a
bilateral impact on gains and losses. By using the EMA, we give more weight to recent price action
and can detect and avoid non-profitable positions much earlier.
To determine the optimal leverage ratio, firstly we calculated the volatility for each market. The
standard deviation for market’s return is 0.5225 for AUD/USD and 0.3227 for EUR/USD respectively
(yahoo finance, n.d.), which indicates that the market is of medium level volatility. Our recommended
leverage ratio is 10:1, meaning every lot (100,000 units) of currency traded, there is a margin
requirement of 10,000 units.
Capital and margin requirements
Our recommendation is that each trader will be responsible for a single currency pair and operates
with $100,000. Wachtel (2012) emphasises the importance of keeping enough cash in the account to
trade in order to cover a normal price move against the investor/client and their risk of having their
position automatically closed before a correct trend forecast can play out in their favour.
If our optimal leverage ratio is set to 10:1, margin is calculated to be 10,000 units base currency per
trade. The best way to avoid a margin call is to never risk more than 1 to 3 percent of the account in
any one trade before the stop loss order is hit. The following table (Kritzer, 2013) shows the margin
rates for each instrument which states the margin rates of 2.4% and 3.0% for AUDUSD and EURUSD
respectively. Hence, operating with a $100,000 would mean the account’s position would not have to
be closed via a margin call before price starts to move in your favour.
Table 1:Selected margin rates and implied leverage ratios (FXCM, 2021)
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Rules for opening a position
1. Long positions:
Rule 1: enter into a long position when the 5 period EMA crosses over the 20 period
EMA from below (Figure 1, Appendix).
Rule 1 is conditional that at the point of rule’s crossover, the 20 period EMA is trading
above the 50 EMA.
2. Short positions:
Rule 2: enter into a short position when the 5 period EMA crosses over the 50 EMA from
above (Figure 2, Appendix).
Rule 2 is conditional that at the point of the crossover, the 20 period EMA is still above
the 50 EMA.
Take profit and closing positions
1. Profit target
Profit target is set at 20 pips above entry price for a long position and 20 pips below for a short
position (Figure 3, Appendix). For example, if AUD/USD moves from 0.7291 to 0.7292, the 0.0001
rise in value is 1 pip.
2. Closing position
For a long position, an initial stop-loss order can be set below the 20-period EMA and a
trailing stop loss of 5 pips. If profit target of 20 pips above entry price is met, initial stop-
loss order can be readjusted up or position can be closed for profit. If profit target is not
met and 5-period EMA reverses to cross 20 EMA from above, close position (Figure 4,
Appendix).
For a short position, an initial stop-loss order can be set above the 50-period EMA and a
trailing stop loss of 5 pips. If profit target of 20 pips below entry price is met, a re-
adjustment of initial stop loss down can occur, or position can be closed for profit. If
profit target is not met and 5-period EMA reverses to cross the 50 EMA from below,
close position (Figure 5, Appendix).
Potential returns
One of the methods risk management to ensure profitable returns is the use of a trailing stop loss
order. Unlike a static stop loss that remains in at one price, our trailing stop will continuously change
in the direction of price action (Paz, 2012). By doing so we are managing any potential sudden
downside that could result in our open trade losing all its unrealised profit.
For example, if we aim for a minimum profit of 20 pips and set the trailing stop for 5 pips away from
entry price. When we entered into a short position for EURUSD trading at 1.3179. (Figure 6,
Appendix) We would apply the trailing stop at 1.3137, 2 pips “in the money” (20 pips minimum profit
plus 2 pips spread cost). If we set a trailing stop of 20 pips, the stop loss would move from the
original stop loss of 1.3209 to 1.3157 (1.3137 plus 20 pips).
If the EURUSD goes down further, our potential profit increases. When the euro drops to 1.3107, our
trade would have a profit of 70 pips and our trailing stop has moved down 30 pips to 1.3127. The
trailing stop is now locking in a profit of 50 pips (1.3179 minus 1.3127, minus the spread). After
hitting the day’s low of 1.3051, the euro heads higher, and our trailing stop is triggered at 1.3071, we
are out of the trade with a profit of 106 pips. Using MetaTrade4 with the aforementioned example
with open price of 1.3179 and close price of 1.3071, the pip value is 13.36 AUD, and we realise a
profit of $1442.96 (Figure 7, Appendix).
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
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Potential trading risks/costs
Small changes in price have a big market impact due to large size of trades
Exchange rates are volatile- affected by fundamental macroeconomic changes in country pairs
and global factors.
Technical analysis may act as a predictable tool but market efficiency hypothesis states that
no group of investors should be able to consistently beat the market using a common
investment strategy (Teall, 2018).
Although there is a theoretical advantage to using EMA over simple moving average due to
ability to respond to changing market conditions faster, in non-trending time periods, returns
from EMA strategy may not be able to compensate for costs of trade. (Ellis & Parbery, 2005)
– long run passive strategy/less trades (longer time frame suits).
Appendix
Figure 1: Entering a long position
Figure 2: Entering a short position
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Figure 3: Profit target
Figure 4: Long position – stop-loss and closing position
Figure 5: Short position – stop-loss and closing position
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Figure 6: Effects of trailing stop loss and realized returns
Figure 7: Profit/loss from trading 1 lot EURUSD
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References
Ellis, C. A., & Parbery, S. A. (2005). Is smarter better? A comparison of adaptive, and simple moving
average trading strategies. Research in International Business and Finance, 19(3), 399-411.
Kritzer, A. (2013). Forex for beginners: A comprehensive guide to profiting from the global currency
markets. Apress.
Meyers, T.A., The Technical Analysis Course. McGraw-Hill, New York (1989)
Paz, J. (2012). The Forex Trading Manual: The Rules-based Approach to Making Money Trading
Currencies. McGraw Hill Professional.
Teall, J. (2018). Financial trading and investing. Academic Press.
Wachtel, C. (2012). The Sensible Guide to Forex: Safer, Smarter Ways to Survive and Prosper from
the Start. John Wiley & Sons, Incorporated.
Yahoo Finance (n.d.) AUDUSD historical data. Retrieved October 20, 2021, from
https://au.finance.yahoo.com/quote/AUDUSD%3DX/history/
Yahoo Finance (n.d.) EURUSD historical data. Retrieved October 20, 2021, from
https://au.finance.yahoo.com/quote/EURUSD%3DX/history?p=EURUSD%3DX
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
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strategy!
A trading strategy report
BY: (470527498),
(490239919), (500152050)
FINC3014 Assignment
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
EMA Cross-Over Strategy
Why use the EMA?
The use of moving averages in technical analysis is a simple tool that can help identify trends over
specific time periods. The cross-over of different period moving averages can signal trend reversals
and profitable trading situations.
Our trading strategy will employ the cross-over of the 5, 20 and 50-period exponential moving
average (EMA) on a 15-minute chart as signals for entering and exiting trades. Due to the volatility of
financial markets, the EMA is a useful indicator for short-term trading as it gives more weight to
recent price action and decreasing weight to older data (Meyers, 1989). The market we recommend
this strategy to be implemented in is foreign exchange market due to its high liquidity and relatively
low fee structure in comparison to other financial markets.
Where to trade and what instruments?
Our strategy will be implemented in the FOREX market, a global decentralized OTC market used for
trading currencies. This decision is attributed to the market’s extreme liquidity coupled with low
transaction costs, in comparison to other financial markets, allowing for small changes in price still
resulting in profitable trades. For the purpose of this brief, we have chosen AUD/USD and EUR/USD
as the currency pairs to be traded. All our trades are recommended to be placed on MetaTrade4
One of the key instruments of FOREX trading is leverage, which allows us to borrow funds in order
to increase one’s trading position. Profitable positions are able to be realized with large trade sizes
through leverage in conjunction with small price changes. However, leverage is said to have a
bilateral impact on gains and losses. By using the EMA, we give more weight to recent price action
and can detect and avoid non-profitable positions much earlier.
To determine the optimal leverage ratio, firstly we calculated the volatility for each market. The
standard deviation for market’s return is 0.5225 for AUD/USD and 0.3227 for EUR/USD respectively
(yahoo finance, n.d.), which indicates that the market is of medium level volatility. Our recommended
leverage ratio is 10:1, meaning every lot (100,000 units) of currency traded, there is a margin
requirement of 10,000 units.
Capital and margin requirements
Our recommendation is that each trader will be responsible for a single currency pair and operates
with $100,000. Wachtel (2012) emphasises the importance of keeping enough cash in the account to
trade in order to cover a normal price move against the investor/client and their risk of having their
position automatically closed before a correct trend forecast can play out in their favour.
If our optimal leverage ratio is set to 10:1, margin is calculated to be 10,000 units base currency per
trade. The best way to avoid a margin call is to never risk more than 1 to 3 percent of the account in
any one trade before the stop loss order is hit. The following table (Kritzer, 2013) shows the margin
rates for each instrument which states the margin rates of 2.4% and 3.0% for AUDUSD and EURUSD
respectively. Hence, operating with a $100,000 would mean the account’s position would not have to
be closed via a margin call before price starts to move in your favour.
Table 1:Selected margin rates and implied leverage ratios (FXCM, 2021)
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
Rules for opening a position
1. Long positions:
Rule 1: enter into a long position when the 5 period EMA crosses over the 20 period
EMA from below (Figure 1, Appendix).
Rule 1 is conditional that at the point of rule’s crossover, the 20 period EMA is trading
above the 50 EMA.
2. Short positions:
Rule 2: enter into a short position when the 5 period EMA crosses over the 50 EMA from
above (Figure 2, Appendix).
Rule 2 is conditional that at the point of the crossover, the 20 period EMA is still above
the 50 EMA.
Take profit and closing positions
1. Profit target
Profit target is set at 20 pips above entry price for a long position and 20 pips below for a short
position (Figure 3, Appendix). For example, if AUD/USD moves from 0.7291 to 0.7292, the 0.0001
rise in value is 1 pip.
2. Closing position
For a long position, an initial stop-loss order can be set below the 20-period EMA and a
trailing stop loss of 5 pips. If profit target of 20 pips above entry price is met, initial stop-
loss order can be readjusted up or position can be closed for profit. If profit target is not
met and 5-period EMA reverses to cross 20 EMA from above, close position (Figure 4,
Appendix).
For a short position, an initial stop-loss order can be set above the 50-period EMA and a
trailing stop loss of 5 pips. If profit target of 20 pips below entry price is met, a re-
adjustment of initial stop loss down can occur, or position can be closed for profit. If
profit target is not met and 5-period EMA reverses to cross the 50 EMA from below,
close position (Figure 5, Appendix).
Potential returns
One of the methods risk management to ensure profitable returns is the use of a trailing stop loss
order. Unlike a static stop loss that remains in at one price, our trailing stop will continuously change
in the direction of price action (Paz, 2012). By doing so we are managing any potential sudden
downside that could result in our open trade losing all its unrealised profit.
For example, if we aim for a minimum profit of 20 pips and set the trailing stop for 5 pips away from
entry price. When we entered into a short position for EURUSD trading at 1.3179. (Figure 6,
Appendix) We would apply the trailing stop at 1.3137, 2 pips “in the money” (20 pips minimum profit
plus 2 pips spread cost). If we set a trailing stop of 20 pips, the stop loss would move from the
original stop loss of 1.3209 to 1.3157 (1.3137 plus 20 pips).
If the EURUSD goes down further, our potential profit increases. When the euro drops to 1.3107, our
trade would have a profit of 70 pips and our trailing stop has moved down 30 pips to 1.3127. The
trailing stop is now locking in a profit of 50 pips (1.3179 minus 1.3127, minus the spread). After
hitting the day’s low of 1.3051, the euro heads higher, and our trailing stop is triggered at 1.3071, we
are out of the trade with a profit of 106 pips. Using MetaTrade4 with the aforementioned example
with open price of 1.3179 and close price of 1.3071, the pip value is 13.36 AUD, and we realise a
profit of $1442.96 (Figure 7, Appendix).
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
Potential trading risks/costs
Small changes in price have a big market impact due to large size of trades
Exchange rates are volatile- affected by fundamental macroeconomic changes in country pairs
and global factors.
Technical analysis may act as a predictable tool but market efficiency hypothesis states that
no group of investors should be able to consistently beat the market using a common
investment strategy (Teall, 2018).
Although there is a theoretical advantage to using EMA over simple moving average due to
ability to respond to changing market conditions faster, in non-trending time periods, returns
from EMA strategy may not be able to compensate for costs of trade. (Ellis & Parbery, 2005)
– long run passive strategy/less trades (longer time frame suits).
Appendix
Figure 1: Entering a long position
Figure 2: Entering a short position
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Figure 3: Profit target
Figure 4: Long position – stop-loss and closing position
Figure 5: Short position – stop-loss and closing position
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Figure 6: Effects of trailing stop loss and realized returns
Figure 7: Profit/loss from trading 1 lot EURUSD
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
References
Ellis, C. A., & Parbery, S. A. (2005). Is smarter better? A comparison of adaptive, and simple moving
average trading strategies. Research in International Business and Finance, 19(3), 399-411.
Kritzer, A. (2013). Forex for beginners: A comprehensive guide to profiting from the global currency
markets. Apress.
Meyers, T.A., The Technical Analysis Course. McGraw-Hill, New York (1989)
Paz, J. (2012). The Forex Trading Manual: The Rules-based Approach to Making Money Trading
Currencies. McGraw Hill Professional.
Teall, J. (2018). Financial trading and investing. Academic Press.
Wachtel, C. (2012). The Sensible Guide to Forex: Safer, Smarter Ways to Survive and Prosper from
the Start. John Wiley & Sons, Incorporated.
Yahoo Finance (n.d.) AUDUSD historical data. Retrieved October 20, 2021, from
https://au.finance.yahoo.com/quote/AUDUSD%3DX/history/
Yahoo Finance (n.d.) EURUSD historical data. Retrieved October 20, 2021, from
https://au.finance.yahoo.com/quote/EURUSD%3DX/history?p=EURUSD%3DX
This study source was downloaded by 100000816289431 from CourseHero.com on 10-10-2023 09:21:37 GMT -05:00
https://www.coursehero.com/file/143438426/FINC3014-ASSIGNMENT-3docx/
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