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The interaction between technical currency trading and exchange rate fluctuations

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  • Schulmeister, Stephan

Abstract

This paper examines the mutually reinforcing interactions between exchange rate dynamics and technical trading strategies. I first show that technical trading systems have been quite profitable during the floating rate period. This profitability stems from the successful exploitation of exchange-rate trends and not from taking winning positions relatively frequently. I then show that technical models exert an excess demand pressure on currency markets. When these models produce trading signals, almost all signals are on the same side of the market, either buying or selling. When technical models maintain open positions they are either long or short. Initial exchange rate movements triggered by news or by stop-loss orders are strengthened by technical trading and are often transformed into a trend. This 'multiplier effect' is reflected by the close relationship between technical trading signals and order flows. Hence, order flows are not only driven by (fundamental) news but also by technical trading, which reinforces exchange rate trends to which it responds.

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Article provided by Elsevier in its journal Finance Research Letters.

Volume (Year): 3 (2006)
Issue (Month): 3 (September)
Pages: 212-233

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Handle: RePEc:eee:finlet:v:3:y:2006:i:3:p:212-233

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Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Momentum Redux
    by quantivity in Quantivity on 2011-06-19 04:14:45
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Cited by:
  1. Schulmeister, Stephan, 2009. "Profitability of technical stock trading: Has it moved from daily to intraday data?," Review of Financial Economics, Elsevier, vol. 18(4), pages 190-201, October.
  2. Holmberg, Ulf & Lönnbark, Carl & Lundström, Christian, 2013. "Assessing the profitability of intraday opening range breakout strategies," Finance Research Letters, Elsevier, vol. 10(1), pages 27-33.
  3. Christopher J. Neely & Paul A. Weller, 2011. "Technical analysis in the foreign exchange market," Working Papers 2011-001, Federal Reserve Bank of St. Louis.
  4. Stephan Schulmeister, 2014. "The Struggle Over the Financial Transactions Tax – A Politico-economic Farce," WIFO Working Papers 474, WIFO.
  5. Stephan Schulmeister, 2008. "Aggregate Trading Behaviour of Technical Models and the Yen-Dollar Exchange Rate 1976-2007," WIFO Working Papers 324, WIFO.
  6. Stephan Schulmeister, 2007. "The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics," WIFO Working Papers 290, WIFO.
  7. Gençay, Ramazan & Gradojevic, Nikola, 2013. "Private information and its origins in an electronic foreign exchange market," Economic Modelling, Elsevier, vol. 33(C), pages 86-93.
  8. Roman Frydman & Michael D. Goldberg & Søren Johansen & Katarina Juselius, 2009. "A Resolution of the Purchasing Power Parity Puzzle: Imperfect Knowledge and Long Swings," CREATES Research Papers 2009-01, School of Economics and Management, University of Aarhus.
  9. Kaltenbrunner, Annina & Nissanke, Machiko, 2009. "The Case for an Intermediate Exchange Rate Regime with Endogenizing Market Structures and Capital Mobility," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
  10. Stephan Schulmeister, 2007. "Manic-depressive Price Fluctuations in the Financial Market – How Does the "Invisible Hand" Do it?," WIFO Working Papers 305, WIFO.
  11. Menkhoff, Lukas & Taylor, Mark P., 2006. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Hannover Economic Papers (HEP) dp-352, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  12. Kurita, Takamitsu, 2014. "Dynamic characteristics of the daily yen–dollar exchange rate," Research in International Business and Finance, Elsevier, vol. 30(C), pages 72-82.
  13. Ülkü, Numan & Prodan, Eugeniu, 2013. "Drivers of technical trend-following rules' profitability in world stock markets," International Review of Financial Analysis, Elsevier, vol. 30(C), pages 214-229.
  14. Gradojevic, Nikola & Gençay, Ramazan, 2013. "Fuzzy logic, trading uncertainty and technical trading," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 578-586.
  15. Nikola Gradojevic & Christopher J. Neely, 2008. "The dynamic interaction of order flows and the CAD/USD exchange rate," Working Papers 2008-006, Federal Reserve Bank of St. Louis.
  16. Lancastle, Neil, 2012. "Circuit theory extended: The role of speculation in crises," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 6(34), pages =1-27.
  17. Nikola Gradojevic & Camillo Lento, 2012. "Multiscale Analysis of Foreign Exchange Order Flows and Technical Trading Profitability," Working Paper Series 31_12, The Rimini Centre for Economic Analysis.
  18. Stephan Schulmeister, 2014. "A General Financial Transactions Tax. Motives, Effects and Implementation According to the Proposal of the European Commission," WIFO Working Papers 461, WIFO.

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