Discovering Financial Patterns in the Foreign Exchange Markets
AbstractMotivated from the charting analysis in the financial industry, Chen and He (2003) are the first to use self-organizing maps to search for and identify price patterns. Such a model is referred to as the trajectory-domain model (TDM). Chen and Tsao (2003) apply the TDMs to three American stock indices, including the Dow Jones, Nasdaq, and S&P 500. It is found that there is some evidence to support the relevance of the TDM to informative pattern discovery. Some patterns discovered by the TDMs can in effect transmit signals of abnormal returns. In this study, we examine a number of interesting questions for the application of the TDM. First, while the TDM seems to be successful in the stock markets, we ask whether the TDM can still discover informative patterns in the foreign exchange markets. In particular, we consider four foreign exchange rates, including TWD/USD, GBP/USD, JPY/USD, and HKD/USD. Second, Neely and Weller (1999) apply the trading rules discovered from DEM/USD to the European Monetary System and conclude that the rules perform well for some of the currencies. This finding seems to suggest that the profitable trading rules discovered from one market could be transferred to one another market. The question we are interested here is to see if the similar results exist when the trading rule is based on the geometric patterns, in particular, the patterns discovered by TDM.
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2004 with number 203.
Date of creation: 11 Aug 2004
Date of revision:
Trajectory-Domain Model; Self-Organizing Maps; Charting Analysis; Exchange Rates;
Find related papers by JEL classification:
- C45 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Neural Networks and Related Topics
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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