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Charting Technical Trading Rules and the Lottery of Technical Analysis: Empirical Evidence from Foreign Exchange Market

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  • Repkine, Alexandre

Abstract

We use trend-following, trend continuation and trend reversal pattern recognition techniques to apply technical charting rules to trading seven major currency pairs for the period of 1999 through early 2007. Our results suggest that the persistent popularity of technical analysis among practicing traders may be the result of a “lottery” wherein most of the participants end up with zero profits. However, the rest of the participants are much more likely to end up winning rather than losing. In this way, the popularity of technical trading rules may co-exist with the validity of market efficiency hypothesis.

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File URL: http://mpra.ub.uni-muenchen.de/7849/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7849.

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Date of creation: Feb 2008
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Handle: RePEc:pra:mprapa:7849

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Keywords: market efficiency; technical analysis; forecasting; foreign exchange markets;

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  1. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  2. Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
  3. Levin, Jay H, 1997. "Chartists, Fundamentalists and Exchange Rate Dynamics," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 2(4), pages 281-90, October.
  4. De Bondt, Werner F M & Thaler, Richard, 1985. " Does the Stock Market Overreact?," Journal of Finance, American Finance Association, vol. 40(3), pages 793-805, July.
  5. Reitz, Stefan, 2006. "On the predictive content of technical analysis," The North American Journal of Economics and Finance, Elsevier, vol. 17(2), pages 121-137, August.
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