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Fuzzy logic, trading uncertainty and technical trading

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  • Gradojevic, Nikola
  • Gençay, Ramazan

Abstract

From the market microstructure perspective, technical analysis can be profitable when informed traders make systematic mistakes or when uninformed traders have predictable impacts on price. However, chartists face a considerable degree of trading uncertainty because technical indicators such as moving averages are essentially imperfect filters with a nonzero phase shift. Consequently, technical trading may result in erroneous trading recommendations and substantial losses. This paper presents an uncertainty reduction approach based on fuzzy logic that addresses two problems related to the uncertainty embedded in technical trading strategies: market timing and order size. The results of our high-frequency exercises show that ‘fuzzy technical indicators’ dominate standard moving average technical indicators and filter rules for the Euro-US dollar (EUR-USD) exchange rates, especially on high-volatility days.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 578-586

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:578-586

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Web page: http://www.elsevier.com/locate/jbf

Related research

Keywords: Foreign exchange markets; Technical trading; Uncertainty; Fuzzy logic; Filtering;

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References

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Cited by:
  1. 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.
  2. Caporin, Massimiliano & Ranaldo, Angelo & Santucci de Magistris, Paolo, 2012. "On the Predictability of Stock Prices: a Case for High and Low Prices," Working Papers on Finance 1213, University of St. Gallen, School of Finance.

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