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Multiscale Analysis of Foreign Exchange Order Flows and Technical Trading Profitability

Author

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  • 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)

Abstract

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.

Suggested Citation

  • Nikola Gradojevic & Camillo Lento, 2012. "Multiscale Analysis of Foreign Exchange Order Flows and Technical Trading Profitability," Working Paper series 31_12, Rimini Centre for Economic Analysis.
  • Handle: RePEc:rim:rimwps:31_12
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    References listed on IDEAS

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    Cited by:

    1. Cheema, Muhammad A. & Nartea, Gilbert V & Man, Yimei, 2017. "Cross-Sectional and Time-Series Momentum Returns and Market States," MPRA Paper 78989, University Library of Munich, Germany.
    2. Bouoiyour, Jamal & Selmi, Refk, 2015. "Is the Internet Search Driving Oil Market? A Revisit through Time-Frequency approaches," MPRA Paper 66214, University Library of Munich, Germany.
    3. Ni, Yensen & Liao, Yi-Ching & Huang, Paoyu, 2015. "MA trading rules, herding behaviors, and stock market overreaction," International Review of Economics & Finance, Elsevier, vol. 39(C), pages 253-265.
    4. repec:voj:journl:v:63:y:2016:i:1:p:45-60 is not listed on IDEAS
    5. repec:eee:ecmode:v:68:y:2018:i:c:p:644-660 is not listed on IDEAS

    More about this item

    Keywords

    Foreign Exchange Markets; Order Flows; Technical Trading; Frequency Domain;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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