Technical Analysis in the Foreign Exchange Market
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Jan 22, 2011, 11:21:23 AM1/22/11
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http://www.forexblog.org/Technical%20Analysis%20in%20the%20Foreign%20Exchange%20Market
Aricle by Forexblog.org
Being a practitioner of fundamental analysis, you could say that I’m
always on the lookout for hard evidence that fundamental analysis is
superior to technical analysis. Thus, I was delighted to discover a
working paper (“Technical Analysis in the Foreign Exchange Market“) by
the St. Louis Branch of the Federal Reserve Bank, released just this
month. Alas, the paper barely touched upon fundamental analysis, but
its conclusions on technical analysis in the currency markets were
startling. In short, the effectiveness of technical analysis in the
currency markets has declined steadily since the 1970s, such that only
the most sophisticated/complicated strategies are currently
profitable.
Rather than conduct original research, the report’s authors –
Christopher J. Neely, an assistant vice president and economist at the
Federal Reserve Bank of St. Louis, and Paul A. Weller, the John F.
Murray Professor of Finance at the University of Iowa – performed a
meta analysis of the existing research. They cited a litany of
studies, covered a variety of topics, sometimes with contradictory
conclusions. In order to ensure comprehensiveness, they looked at the
profitability of numerous types of technical analysis indicators,
across numerous currency pairs, over time, in different types of
trading environments, and adjusted for risk.
All of the earlier studies, dating back to the 1960s, established the
profitability of technical analysis, even when it was simplistic.
Since then, however, most studies have shown steadily declining
effectiveness: “TTRs [Technical Trading Rules] ere able to earn
genuine risk-adjusted excess returns in foreign exchange markets at
least from the mid-1970s until about 1990…and that rule profitability
has been declining since the late 1980s.” The same trend has unfolded
in the last decade, as traders have relied increasingly on
computerized trading strategies: “Kozhan and Salmon (2010), using high
frequency data, find that trading rules derived from a genetic
algorithm were profitable in 2003 but that this was no longer true in
2008.”
Given that the two authors also concede that the financial markets are
undoubtedly inefficient and that currency markets in particular are
filled with observable trends, how should we understand this decline
in the effectiveness of technical analysis? In one word, the answer is
competition. “Profit opportunities will generally exist in financial
markets but…learning and competition will gradually erode ["arbitrage
away"] these opportunities as they become known.” In addition, there
has been a “dramatic rise in the volume of algorithmic trading,” which
has given rise to a so-called financial arms race to develop ever-more
sophisticated trading strategies.
Indeed, the research shows that “more complex strategies will persist
longer than simple ones. And as some strategies decline as they become
less profitable, there will be a tendency for other strategies to
appear in response to the changing market environment.” In addition,
technical analysis that is used to trade exotic (i.e. less liquid)
currencies is more likely to be profitable than major currencies,
especially the US Dollar.
The report opens the door to further research, by indicating that
“Technical trading can be consistently profitable in certain
circumstances.” As if it wasn’t already clear, though, the vast
majority of technical traders (perhaps all traders for that matter)
are destined to be outmaneuvered and will ultimately lose money
trading forex. Another way of looking at this, however, is that the
the savviest traders – those that can spot complex trends and execute
trading strategies quickly – still have a chance at earning consistent
profits.
Aricle by Forexblog.org
Being a practitioner of fundamental analysis, you could say that I’m
always on the lookout for hard evidence that fundamental analysis is
superior to technical analysis. Thus, I was delighted to discover a
working paper (“Technical Analysis in the Foreign Exchange Market“) by
the St. Louis Branch of the Federal Reserve Bank, released just this
month. Alas, the paper barely touched upon fundamental analysis, but
its conclusions on technical analysis in the currency markets were
startling. In short, the effectiveness of technical analysis in the
currency markets has declined steadily since the 1970s, such that only
the most sophisticated/complicated strategies are currently
profitable.
Rather than conduct original research, the report’s authors –
Christopher J. Neely, an assistant vice president and economist at the
Federal Reserve Bank of St. Louis, and Paul A. Weller, the John F.
Murray Professor of Finance at the University of Iowa – performed a
meta analysis of the existing research. They cited a litany of
studies, covered a variety of topics, sometimes with contradictory
conclusions. In order to ensure comprehensiveness, they looked at the
profitability of numerous types of technical analysis indicators,
across numerous currency pairs, over time, in different types of
trading environments, and adjusted for risk.
All of the earlier studies, dating back to the 1960s, established the
profitability of technical analysis, even when it was simplistic.
Since then, however, most studies have shown steadily declining
effectiveness: “TTRs [Technical Trading Rules] ere able to earn
genuine risk-adjusted excess returns in foreign exchange markets at
least from the mid-1970s until about 1990…and that rule profitability
has been declining since the late 1980s.” The same trend has unfolded
in the last decade, as traders have relied increasingly on
computerized trading strategies: “Kozhan and Salmon (2010), using high
frequency data, find that trading rules derived from a genetic
algorithm were profitable in 2003 but that this was no longer true in
2008.”
Given that the two authors also concede that the financial markets are
undoubtedly inefficient and that currency markets in particular are
filled with observable trends, how should we understand this decline
in the effectiveness of technical analysis? In one word, the answer is
competition. “Profit opportunities will generally exist in financial
markets but…learning and competition will gradually erode ["arbitrage
away"] these opportunities as they become known.” In addition, there
has been a “dramatic rise in the volume of algorithmic trading,” which
has given rise to a so-called financial arms race to develop ever-more
sophisticated trading strategies.
Indeed, the research shows that “more complex strategies will persist
longer than simple ones. And as some strategies decline as they become
less profitable, there will be a tendency for other strategies to
appear in response to the changing market environment.” In addition,
technical analysis that is used to trade exotic (i.e. less liquid)
currencies is more likely to be profitable than major currencies,
especially the US Dollar.
The report opens the door to further research, by indicating that
“Technical trading can be consistently profitable in certain
circumstances.” As if it wasn’t already clear, though, the vast
majority of technical traders (perhaps all traders for that matter)
are destined to be outmaneuvered and will ultimately lose money
trading forex. Another way of looking at this, however, is that the
the savviest traders – those that can spot complex trends and execute
trading strategies quickly – still have a chance at earning consistent
profits.
backspace
Jan 22, 2011, 11:57:32 AM1/22/11
to futures trading
The euro in 2010 dec 2011 jan around had a sharp decline due to
Portugal. At first it looked as though Portugal will need a bail-out
with the euro declining sharply. Then China intervened and the euro
rallied sharply. The euro fell and rose because of fundamental
factors: an historical event took place and history never repeats
itself.
http://www.stratfor.com makes the mistake in their analysis of global
events by assuming history repeats itself. For example they state that
the wave of illegal immigrants will be assimilated because the
previous immigration wave from Europe a hundred years ago was
assimilated. This is an incorrect view because the factors back then
was different. Today we have different dynamics which need to be
evaluated in a different context.
Portugal. At first it looked as though Portugal will need a bail-out
with the euro declining sharply. Then China intervened and the euro
rallied sharply. The euro fell and rose because of fundamental
factors: an historical event took place and history never repeats
itself.
http://www.stratfor.com makes the mistake in their analysis of global
events by assuming history repeats itself. For example they state that
the wave of illegal immigrants will be assimilated because the
previous immigration wave from Europe a hundred years ago was
assimilated. This is an incorrect view because the factors back then
was different. Today we have different dynamics which need to be
evaluated in a different context.
backspace
Jan 28, 2011, 4:55:15 AM1/28/11
to futures trading
On Jan 22, 6:57 pm, backspace <stephan...@gmail.com> wrote:
> The euro in 2010 dec 2011 jan around had a sharp decline due to
> Portugal. At first it looked as though Portugal will need a bail-out
> with the euro declining sharply. Then China intervened and the euro
> rallied sharply. The euro fell and rose because of fundamental
> factors: an historical event took place and history never repeats
> itself.
>
> events by assuming history repeats itself. For example they state that
> the wave of illegal immigrants will be assimilated because the
> previous immigration wave from Europe a hundred years ago was
> assimilated. This is an incorrect view because the factors back then
> was different. Today we have different dynamics which need to be
> evaluated in a different context.
http://www.nytimes.com/2011/01/27/education/27colleges.html?_r=1&nl=todaysheadlines&emc=tha2
> the wave of illegal immigrants will be assimilated because the
> previous immigration wave from Europe a hundred years ago was
> assimilated. This is an incorrect view because the factors back then
> was different. Today we have different dynamics which need to be
> evaluated in a different context.
The factors today for job creation differ from what it was 20 years
ago placing strain on students. IF not even legal residents with
degrees will find jobs then how will illiterate illegal immigrants.
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