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Multiscale Analysis of Foreign Exchange Order Flows and Technical Trading Profitability

Listed author(s):
  • Nikola Gradojevic

    ()

    (Faculty of Business Administration, Lakehead University, Canada; Rouen Business School, France; The Rimini Centre for Economic Analysis, Italy)

  • Camillo Lento

    ()

    (Faculty of Business Administration, Lakehead University, Canada; School of Accounting, Economics and Finance, University of Southern Queensland, Australia)

This paper investigates the multiscale (frequency-dependent) relationship between technical trading profitability and feedback trading effects in the Canada/U.S. dollar foreign exchange market. The results suggest weak evidence that technical trading activities of financial and non-financial customers drive frequent violations of the FX market microstructure assumption that exchange rate movements are driven by order flow. After controlling for transaction costs, we find that the contribution of financial customers in feedback trading dominates the contribution of non-financial customers at lower frequencies, while the opposite holds at higher frequencies. In addition, the novel finding is that technical indicators constructed from order flows can be profitable.

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Paper provided by The Rimini Centre for Economic Analysis in its series Working Paper Series with number 31_12.

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Date of creation: Jun 2012
Handle: RePEc:rim:rimwps:31_12
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