Illusory Profitability of Technical Analysis in Emerging Foreign Exchange Markets

Abstract

We conduct an extensive examination of profitability of technical analysis in ten emerging foreign exchange markets. Studying 25988 trading strategies, we find that best rules can sometimes generate an annually mean excess return of more than 30%. Based on standard tests, we find hundreds to thousands of seemingly significantly profitable strategies. Almost all these profits vanish once the data snooping bias is taken into account. We also show that out-of-sample test can have severe data snooping bias too. Overall, we find that the profitability of technical analysis in emerging foreign exchange markets is illusory.

Keywords: Foreign Exchange, Technical Trading, Data Snooping, Emerging Market

JEL Classification: C12, F31, G14, G15