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The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis

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Author Info
Menkhoff, Lukas
Taylor, Mark P.

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Abstract

Technical analysis involves the prediction of future exchange rate (or other asset-price) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to significant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour; that technical analysis may exploit the influence of central bank interventions; that technical analysis may be an efficient form of information processing; and finally that it may provide information on non-fundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis.

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Paper provided by Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Diskussionspapiere der Wirtschaftswissenschaftlichen Fakultät der Universität Hannover with number dp-352.

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Length: 55 pages
Date of creation: Nov 2006
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Handle: RePEc:han:dpaper:dp-352

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Related research
Keywords: foreign exchange market technical analysis market microstructure

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange

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  1. Christopher J. Neely & Paul A. Weller & Joshua M. Ulrich, 2007. "The adaptive markets hypothesis: evidence from the foreign exchange market," Working Papers 2006-046, Federal Reserve Bank of St. Louis. [Downloadable!]
  2. Stephan Schulmeister, 2007. "Performance of Technical Trading Systems in the Yen/Dollar Market," WIFO Working Papers 291, WIFO. [Downloadable!]
  3. Stephan Schulmeister, 2007. "The Interaction Between the Aggregate Behaviour of Technical Trading Systems and Stock Price Dynamics," WIFO Working Papers 290, WIFO. [Downloadable!]
  4. Stephan Schulmeister, 2007. "Manic-depressive Price Fluctuations in the Financial Market – How Does the "Invisible Hand" Do it?," WIFO Working Papers 305, WIFO. [Downloadable!]
  5. Zwart, G.J. de & Markwat, T.D. & Swinkels, L. & Dijk, D.J.C. van, 2007. "The Economic Value of Fundamental and Technical Information in Emerging Currency Markets," Research Paper ERS-2007-096-F&A Revision, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus Uni. [Downloadable!]
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