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

Igor Cialenco

Illinois Institute of Technology

Aris Protopapadakis

University of Southern California - Marshall School of Business - Finance and Business Economics Department

Date Written: November 28, 2006

Abstract

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

Cialenco, Igor and Protopapadakis, Aris, Do Technical Trading Profits Remain in the Foreign Exchange Market? Evidence from Fourteen Currencies (November 28, 2006). Marshall School of Business Working Paper No. 09-06. Available at SSRN: https://ssrn.com/abstract=947589 or http://dx.doi.org/10.2139/ssrn.947589

Igor Cialenco

Illinois Institute of Technology ( email )

Department of Applied Mathematics
10 West 32nd Str, Bld E1, Room 208
Chicago, IL 60616
United States
3125673131 (Phone)

HOME PAGE: http://math.iit.edu/~igor/

Aris Protopapadakis (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6537 (Phone)
213-740-6650 (Fax)

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