The foreign exchange (forex) market is the most liquid financial market in the world. There are many different types of players in the forex market including large investment bank, currency speculator, cooperation, government, private trader and so on. The market behavior is highly volatile, non linear and unpredictable. There are some smart investors able to catch some profitable moments but in general it is very hard to be profitable in the market.
The traditional technical indicators such as moving average, stochastic oscillator, MACD and etc played an important role for the investors to gauge the state of the market. Although some people are reluctant to believe in the technical indicators, it is also true that the traders can’t sorely rely on the fundamental analysis alone either. Therefore the profitable investors often combine technical analysis with fundamental analysis as well as news. The technical indicators may be appealing more to traders recently as many winner of the forex competition actually bases their trading strategy on the technical indicators alone.
The traditional technical indicators are lagging and they can’t handle market shock effectively. The large shock (or noisy in time series terminology) in the market often generates false signals in the technical indicators. If the trader increases the period of the moving average, the moving average can overcome the shock but it will seriously lag behind the actual price movements as shown in Figure 1. Due to the lagging, the trader will miss the profitable entry or exit point. If the trader reduces the period of the moving average, the moving average will be lagging less but the moving average will produce a lot of false signal (whip-saw patterns) confusing the trader.
We are not living on 1970s anymore and there were lots of attempts to improve the traditional technical indicators by smart mathematicians and programmers. For example, Hull moving average, non lag moving average, center of gravity and many other recently developed moving average techniques can handle lagging and shock more effectively than the traditional moving average as shown in Figure 2.
With the latest signal processing and time series science, it is possible to produce even faster and smoother moving average than what is available in the recent markets. The spectral zero lag trend indicator is the product of the latest applied signal processing and time series science. The signal processing techniques such as Fourier spectrum analysis, Wavelet analysis, Singular spectrum analysis, empirical mode decomposition and so on are useful tools to extract the important cyclic pattern from the forex market. From our study, the traditional technical indicators does not work well for the complex forex market as their main computation is based on the simple arithmetic mean algorithm which is not effective to capture the non linear dynamic of the forex market.
To avoid this pitfall the spectral zero lag trend indicator uses the frame work of the wavelet analysis to extract the significant cyclic pattern in the forex market. The method is further enhanced by measuring similarity and dissimilarity between different data points using the nearest neighbor technique to produce smoother curve. Therefore the spectral zero lag trend indicator can avoids the pitfalls of the other technical indicators suffering from such as lagging and whipsaw effects.
The wavelet analysis and singular spectrum analysis are powerful technique available to the traders. However wavelet analysis and singular spectrum analysis leaves a tricky questions to the average traders. For example, the trader must answer the question which component is signal and which component is noisy before they apply those techniques in real trading. The question is even difficult one for the experienced researcher in the area and the answer is often controversial. The spectral zero lag trend indicator does not leave such a difficult question to the trader. But it does all the serious calculation and statistical testing for the trader at the background. The forex traders just need to enjoy the benefit from this latest science.
In addition to the spectral zero lag trend indicator, the spectral zero lag oscillator was developed to provide the different information to traders. If the spectral zero lag trend indicator provides the direction of the market, the spectral zero lag oscillator provides the measure for the strength of the current trend. The spectral zero lag oscillator gauges if the market momentum is accelerating or slowing down. For example if the spectral zero lag oscillator reaches around either extreme value 0 or 100, it tells the trader that the market is slowing down and the direction may be change in the near future. The spectral zero lag oscillator like the spectral zero lag trend indicator is very calm to the market shock and in general it anticipates the new movement of the market in advance. With both the spectral zero lag trend and oscillator the forex trader can get the full insight of the market state.
In conclusion, we present the spectral zero lag trend and oscillator indicators for traders seeking a possible opportunities in the forex market. The spectral zero lag trend and oscillator indicators are unique and powerful but not bullet proof. The right use of the indicators with fundamental analysis can yield the most profitable strategies. With these indicators, your burden on the technical analysis will be significantly reduced and you will not often be tested on the false signals like the traders who rely on traditional technical indicators.