Do Technical Trading Profits Remain in the Foreign Exchange Market? Evidence from Fourteen Currencies
59 Pages Posted: 1 Dec 2006 Last revised: 24 Oct 2010
Date Written: November 28, 2006
We examine the in- and out-of-sample behavior of two popular trading systems, Alexander and Double MA filters, for fourteen developed-country currencies using daily data with bid-ask spreads. We find significant in-sample returns in the early periods. But out-of-sample returns are lower and only occasionally significant. We show that a currency risk factor proposed in the literature is systematically related to these returns. We find no support for the hypotheses that falling transactions costs are responsible for declining trading profits or for the Adaptive Market hypothesis. Importantly, we show that algorithms that simulate out-of-sample returns have serious instability difficulties.
Keywords: trading rules, return rates, interest rate parity
JEL Classification: F30, F31, F36, G12, G15, M21
Suggested Citation: Suggested Citation