Multiscale Analysis of Foreign Exchange Order Flows and Technical Trading Profitability

30 Pages Posted: 17 Jun 2012

See all articles by Nikola Gradojevic

Nikola Gradojevic

University of Guelph, Department of Economics and Finance; University of Bologna - Rimini Center for Economic Analysis (RCEA)

Camillo Lento

Lakehead University

Date Written: May 2012

Abstract

This paper investigates the multiscale (frequency-dependent) relationship between technical trading profitability and feedback trading effects in the Canada/U.S. dollar foreign exchange market. The results suggest weak evidence that technical trading activities of financial and non-financial customers drive frequent violations of the FX market microstructure assumption that exchange rate movements are driven by order flow. After controlling for transaction costs, we find that the contribution of financial customers in feedback trading dominates the contribution of non-financial customers at lower frequencies, while the opposite holds at higher frequencies. In addition, the novel finding is that technical indicators constructed from order flows can be profitable.

Keywords: Foreign Exchange Markets, Order Flows, Technical Trading, Frequency Domain

JEL Classification: F31, G14, C53

Suggested Citation

Gradojevic, Nikola and Lento, Camillo, Multiscale Analysis of Foreign Exchange Order Flows and Technical Trading Profitability (May 2012). Available at SSRN: https://ssrn.com/abstract=2085497 or http://dx.doi.org/10.2139/ssrn.2085497

Nikola Gradojevic (Contact Author)

University of Guelph, Department of Economics and Finance ( email )

50 Stone Road East
Guelph, Ontario N1G 2W1
Canada

HOME PAGE: http://https://www.uoguelph.ca/economics/users/nikola-gradojevic

University of Bologna - Rimini Center for Economic Analysis (RCEA) ( email )

Via Patara, 3
Rimini (RN), RN 47900
Italy

Camillo Lento

Lakehead University ( email )

955 Oliver Road
Thunder Bay, Ontario P7B 5E1
Canada

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