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The Profitability of Trading in the Foreign Exchange Market: Chartists, Fundamentalists, and Simpletons

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  • Pilbeam, Keith

Abstract

This paper examines the returns and ex post variability of returns associated with the investment strategies of three distinctive groups of hypothetical traders in the foreign exchange market: Chartists, Fundamentalists, and Simpletons. Each group consists of three heterogeneous traders and is distinguished by its use of a different information set for trading purposes. We compare the returns associated with these imperfect traders to those of a perfect trader. The analysis covers four bilateral dollar parities using quarterly data over the period 1974-94. We find that statistically speaking no particular group dominates the others in terms of profitability. With respect to variability, there are some statistically significant differences but no robust conclusions can be drawn. We also find that in terms of yield a random walk investment strategy is beaten for all four parities by a strategy that relies upon recent extrapolation. Copyright 1995 by Royal Economic Society.

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  • Pilbeam, Keith, 1995. "The Profitability of Trading in the Foreign Exchange Market: Chartists, Fundamentalists, and Simpletons," Oxford Economic Papers, Oxford University Press, vol. 47(3), pages 437-452, July.
  • Handle: RePEc:oup:oxecpp:v:47:y:1995:i:3:p:437-52
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    Cited by:

    1. Lukas Menkhoff & Mark P. Taylor, 2007. "The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis," Journal of Economic Literature, American Economic Association, vol. 45(4), pages 936-972, December.
    2. Bagella, Michele & Becchetti, Leonardo & Adriani, Fabrizio, 2005. "Observed and "fundamental" price-earning ratios: A comparative analysis of high-tech stock evaluation in the US and in Europe," Journal of International Money and Finance, Elsevier, vol. 24(4), pages 549-581, June.
    3. De Grauwe, Paul & Markiewicz, Agnieszka, 2013. "Learning to forecast the exchange rate: Two competing approaches," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 42-76.
    4. Rotheli, Tobias F., 2002. "Bandwagon effects and run patterns in exchange rates," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 12(2), pages 157-166, April.

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