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Currency Orders and Exchange-Rate Dynamics: Explaining the Success of Technical Analysis

45 Pages Posted: 9 Aug 2006  

Carol L. Osler

Brandeis University - International Business School

Date Written: April 2001

Abstract

This paper provides a microstructural explanation for the success of two familiar predictions from technical analysis: 1) trends tend to be reversed at predictable support and resistance levels, and 2) trends gain momentum once predictable support and resistance levels are crossed.

The explanation is based on a close examination of stop-loss and take-profit orders at a large foreign exchange dealing bank. Take-profit orders tend to reflect price trends, and stop-loss orders tend to intensify trends. The requested execution rates of these orders are strongly clustered at round numbers, which are often used as support and resistance levels. Significantly, there are marked differences between the clustering patterns of stop-loss and take-profit orders, and between the patterns of stop-loss buy and stop-loss sell orders. These differences explain the success of the two predictions.

Keywords: currency orders, high frequency, technical analysis

JEL Classification: G1, F3

Suggested Citation

Osler, Carol L., Currency Orders and Exchange-Rate Dynamics: Explaining the Success of Technical Analysis (April 2001). FRB of New York Staff Report No. 125. Available at SSRN: https://ssrn.com/abstract=923370 or http://dx.doi.org/10.2139/ssrn.923370

Carol L. Osler (Contact Author)

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States
781-736-4826 (Phone)

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