Technical Trading: Is it Still Beating the Foreign Exchange Market?

54 Pages Posted: 18 Apr 2016

See all articles by Po-Hsuan Hsu

Po-Hsuan Hsu

National Tsing Hua University - Department of Quantitative Finance; National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER)

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School; Centre for Economic Policy Research (CEPR); Brookings Institution

Zigan Wang

Tsinghua University; The University of Hong Kong - School of Economics and Finance; Columbia University

Date Written: April 12, 2016

Abstract

We carry out a large-scale investigation of technical trading rules in the foreign exchange market, using daily data over 45 years for 30 developed and emerging market currencies. Employing a stepwise test to counter data-snooping bias and examining over 21,000 technical rules, we find evidence of substantial predictability and excess profitability in both developed and emerging currencies, measured against a variety of performance metrics. We cross-validate our results using out-of-sample analysis. We find time-series and cross-sectional variation in sub-periods and cultural and/or geographic groups, respectively, suggesting that temporarily not-fully-rational behavior and market immaturity generate technical predictability and potential excess profitability.

Keywords: Foreign exchange, technical analysis, trading rules, data-snooping bias

JEL Classification: F31, C53, G15

Suggested Citation

Hsu, Po-Hsuan and Taylor, Mark P. and Wang, Zigan, Technical Trading: Is it Still Beating the Foreign Exchange Market? (April 12, 2016). Journal of International Economics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2765673

Po-Hsuan Hsu (Contact Author)

National Tsing Hua University - Department of Quantitative Finance ( email )

101, Section 2, Kuang-Fu Road
Hsinchu, Taiwan 300
China

National University of Singapore (NUS) - Asian Bureau of Finance and Economic Research (ABFER) ( email )

BIZ 2 Storey 4, 04-05
1 Business Link
Singapore, 117592
Singapore

Mark P. Taylor

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1156
St. Louis, MO 63130-4899
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Zigan Wang

Tsinghua University ( email )

Beijing, 100084
China

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

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