Head and Shoulders: Not Just a Flaky Pattern

67 Pages Posted: 22 Jun 2007  

Carol L. Osler

Brandeis University - International Business School

P. H. Kevin Chang

Credit Suisse AG - London Headquarters

Date Written: August 1995

Abstract

This paper evaluates rigorously the predictive power of the head-and-shoulders pattern as applied to daily exchange rates. Though such visual, nonlinear chart patterns are applied frequently by technical analysts, our paper is one of the first to evaluate the predictive power of such patterns. We apply a trading rule based on the head-and-shoulders pattern to daily exchange rates of major currencies versus the dollar during the floating rate period (from March 1973 to June 1994). We identify head-and-shoulders patterns using an objective, computer-implemented algorithm based on criteria in published technical analysis manuals. The resulting profits, replicable in real-time, are then compared with the distribution of profits for 10,000 simulated series generated with the bootstrap technique under the null hypothesis of a random walk.

Keywords: technical analysis, rational expectations, exchange rates

JEL Classification: F31, G12, G14

Suggested Citation

Osler, Carol L. and Chang, P. H. Kevin, Head and Shoulders: Not Just a Flaky Pattern (August 1995). FRB of New York Staff Report No. 4. Available at SSRN: https://ssrn.com/abstract=993938 or http://dx.doi.org/10.2139/ssrn.993938

Carol L. Osler (Contact Author)

Brandeis University - International Business School ( email )

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

P.H. Kevin Chang

Credit Suisse AG - London Headquarters ( email )

One Cabot Square
London E14 4QJ
United Kingdom
+44 171 888 8535 (Phone)
+44 171 888 4775 (Fax)

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