Technical Trading Rule Profitability in Currencies: It’s All About Momentum

Abstract

Recent academic and practitioner attention has focused on currency momentum. In this paper we replicate technical trading rules to assess their relationship with momentum. From an investment perspective, the average out-of-sample pre-transaction cost Sharpe ratio of technical trading rules is +0.06, but the returns do not survive modest transaction costs. For the full sample period, controlling for time series momentum, the returns to the trading rule portfolios are not statistically different from zero. Technical trading rules are fully explained by time series momentum and their profitability in currencies has disappeared.

Keywords: Momentum, technical trading rules, currencies

JEL Classification: F31, G14, G19