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Technical Analysis in Foreign Exchange Markets: Linear Versus Nonlinear Trading Rules

FEDEA Int. Economics & Finance DEFI Working Paper No. 00-02

21 Pages Posted: 27 Jul 2001  

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Simon Sosvilla-Rivero

Complutense Institute for International Studies

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science

Date Written: September 2000

Abstract

In this paper we assess the economic significance of the nonlinear predictability of EMS exchange rates. To that end, and using daily data for nine EMS currencies covering the 1st January 1978-31st December 1994 period, we consider nearest-neighbour nonlinear predictors, transforming their forecasts into a technical trading rule, whose profitability has been evaluated against the traditional (linear) moving average trading rules, considering both interest rates and transaction costs. Our results suggest that in most of the cases a trading rule based on a nonlinear predictor outperforms the moving average, both in terms of returns and in terms of the ideal profit and the Sharpe ratio profitability indicators.

Keywords: Nearest-neighbour prediction methods, Technical trading rules, Exchange rates

JEL Classification: C53, F31

Suggested Citation

Fernández Rodríguez, Fernando and Sosvilla-Rivero, Simon and Andrada Félix, Julián, Technical Analysis in Foreign Exchange Markets: Linear Versus Nonlinear Trading Rules (September 2000). FEDEA Int. Economics & Finance DEFI Working Paper No. 00-02. Available at SSRN: https://ssrn.com/abstract=275161 or http://dx.doi.org/10.2139/ssrn.275161

Fernando Fernández Rodríguez

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

Campus de Tafira
E-35017 Las Palmas
Spain
+34 928 45 18 02 (Phone)
+34 928 45 18 29 (Fax)

Simon Sosvilla-Rivero (Contact Author)

Complutense Institute for International Studies ( email )

Carretera de Humera s/n
Madrid, Madrid 28223
Spain
+34913932626 (Phone)

HOME PAGE: http://www.ucm.es/info/ecocuan/ssr/

Julián Andrada Félix

University of Las Palmas de Gran Canaria - Faculty of Economic Science ( email )

E-35017 Las Palmas
Spain
+34 928 45 59 89 (Phone)
+34 928 45 18 29 (Fax)

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