Methodical Madness: Technical Analysis and the Irrationality of Exchange-Rate Forecasts
Substantial empirical research documents that exchange-rate forecasts are not formed rationally. This paper identifies a common technical trading signal, the head-and-shoulders pattern, as a potential source of departures from rationality in exchange-rate forecasts. Forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994, using two criteria for rationality: profitability and efficiency. Resulting profits, replicable in real-time, are tested for statistical significance using a bootstrap technique. We find that the rule is profitable, but not efficient, since it is dominated by simpler trading rules.
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Volume (Year): 109 (1999)
Issue (Month): 458 (October)
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