Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs

The aim of this study is to test a trading system based on the average directional index, which is complemented with the parabolic stop and reverse indicator. The trend-based system is tested onto the most actively traded USD based foreign currency pairs, using both monthly and weekly data set over...

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Main Author: Ikhlaas Gurrib
Format: Article
Language:English
Published: LLC "CPC "Business Perspectives" 2018-08-01
Series:Banks and Bank Systems
Subjects:
Online Access:https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/10757/BBS_2018_03_Gurrib.pdf
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author Ikhlaas Gurrib
author_facet Ikhlaas Gurrib
author_sort Ikhlaas Gurrib
collection DOAJ
description The aim of this study is to test a trading system based on the average directional index, which is complemented with the parabolic stop and reverse indicator. The trend-based system is tested onto the most actively traded USD based foreign currency pairs, using both monthly and weekly data set over 2000–2018. Sharpe and Sortino measures are used to track the performance of the currency pairs, based on total risk and downside risk assumptions. Results are robust tested by decomposing the data into pre and post 2008 financial crisis. Using an investment horizon over 18 years, the reliance upon the monthly model produced lower maximum drawdowns and lesser trades than the weekly model. While Swiss Franc had the best (worse) performance in the monthly (weekly) based model, the Chinese Renminbi witnessed the worse (best) performance in the monthly (weekly) based model. Pre and post financial crisis decompositions suggest the weekly-based system is more reliable than the monthly one with relatively more trades and positive performance, where the Chinese Renminbi and Japanese Yen posted the highest Sharpe and Sortino values of 0.996 and 4.452 respectively in the post crisis period. Proportionately high level of negative returns coupled with relatively low positive Sharpe and Sortino values, however, suggest that a trading system relying on the average directional index and parabolic stop and reverse indicator to be further tested and analyzed at higher frequencies.
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spelling doaj.art-c9e4205156864d86b906f30a229930b92022-12-21T19:17:07ZengLLC "CPC "Business Perspectives"Banks and Bank Systems1816-74031991-70742018-08-01133587010.21511/bbs.13(3).2018.0610757Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairsIkhlaas Gurrib0Ph.D. (Finance), Chair of Accounting and Finance, Canadian University of DubaiThe aim of this study is to test a trading system based on the average directional index, which is complemented with the parabolic stop and reverse indicator. The trend-based system is tested onto the most actively traded USD based foreign currency pairs, using both monthly and weekly data set over 2000–2018. Sharpe and Sortino measures are used to track the performance of the currency pairs, based on total risk and downside risk assumptions. Results are robust tested by decomposing the data into pre and post 2008 financial crisis. Using an investment horizon over 18 years, the reliance upon the monthly model produced lower maximum drawdowns and lesser trades than the weekly model. While Swiss Franc had the best (worse) performance in the monthly (weekly) based model, the Chinese Renminbi witnessed the worse (best) performance in the monthly (weekly) based model. Pre and post financial crisis decompositions suggest the weekly-based system is more reliable than the monthly one with relatively more trades and positive performance, where the Chinese Renminbi and Japanese Yen posted the highest Sharpe and Sortino values of 0.996 and 4.452 respectively in the post crisis period. Proportionately high level of negative returns coupled with relatively low positive Sharpe and Sortino values, however, suggest that a trading system relying on the average directional index and parabolic stop and reverse indicator to be further tested and analyzed at higher frequencies.https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/10757/BBS_2018_03_Gurrib.pdfaverage directional indexforeign currency marketsSharpeSortino
spellingShingle Ikhlaas Gurrib
Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs
Banks and Bank Systems
average directional index
foreign currency markets
Sharpe
Sortino
title Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs
title_full Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs
title_fullStr Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs
title_full_unstemmed Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs
title_short Performance of the Average Directional Index as a market timing tool for the most actively traded USD based currency pairs
title_sort performance of the average directional index as a market timing tool for the most actively traded usd based currency pairs
topic average directional index
foreign currency markets
Sharpe
Sortino
url https://businessperspectives.org/images/pdf/applications/publishing/templates/article/assets/10757/BBS_2018_03_Gurrib.pdf
work_keys_str_mv AT ikhlaasgurrib performanceoftheaveragedirectionalindexasamarkettimingtoolforthemostactivelytradedusdbasedcurrencypairs