The Obstinate Passion of Foreign Exchange Professionals: Technical Analysis

By Lukas Menkhoff, Mark P. Taylor. 2007

477 citations recorded by the source corpus.

Technical analysis involves the prediction of asset price movements from inductive analysis of past movements. We establish a number of stylized facts, including that technical analysis is widespread in the foreign exchange market and that it may be profitable. We then analyze four arguments that have been put forward to explain this: that the market may not be fully rational; that technical analysis may exploit the influence of official interventions; that it may be an efficient form of information processing; and that it may inform on nonfundamental influences. While each may have some validity, the latter is the most plausible.

Subfields: Finance

View Paper: https://www.semanticscholar.org/paper/fd79b83fedb087030b2e770ba27031193062547f

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Citations in the corpus

Assessing the Efficacy of Adjustable Moving Averages Using ASEAN-5 Currencies (2016, methodology): “Other contributions involving more advanced techniques include those of Cheung and Wong [10], Gehrig and Menkhoff [5], Andrada and Fernandez [13], Zhang [14] and Jin and Kim [15].”
The Adaptive Markets Hypothesis: Evidence from the Foreign Exchange Market (2009, methodology): “Dueker and Neely (2007) used a trading rule based on a Markov switching model of interest-adjusted exchange rate returns.”
The bull and bear market model of Huang and Day : Some extensions and new results (2013, unknown): “For instance, the survey study conducted by Menkhoff and Taylor (2007) revealed that market participants do indeed rely on technical and fundamental analysis to predict financial market prices (this has also been found in laboratory experiments; see, e.g. Hommes 2011).”
A simple model of a speculative housing market (2012, background): “10 Empirical support for the assumption that fundamentalisms gains in popularity as speculative prices start to deviate from their fundamentals is, for instance, provided by Reitz and Westerhoff (2007), Menkhoff et al.”
The Evolution of Stock Market Efficiency Over Time: A Survey of the Empirical Literature (2011, background): “…over time, and they find that the positive excess returns identified in the 1970s and 1980s have declined substantially in the mid-1990s (see Menkhoff and Taylor, 2007; Park and Irwin, 2007; Neely et al., Journal of Economic Surveys (2011) Vol. 25, No. 1, pp. 69–108 C© 2010 Blackwell…”
A Forex trading system based on a genetic algorithm (2012, background): “In fact, technical analysis is widely used, particularly in the foreign exchange market (Menkhoff and Taylor 2007; Neely et al. 2009), and there is evidence that, at least until the early 1990s, it generated signiﬁcant excess returns (Sweeney 1986; Levich and Thomas 1993; LeBaron 1999, 2002; Olson…”
Heterogeneity in Exchange Rate Expectations: Evidence on the Chartist-Fundamentalist Approach (2009, background): “Its main insight related to our research implies that technical analysis is, indeed, of high importance among foreign exchange professionals such as dealers and fund managers, a finding which has held from the 1970s to the present day (see Menkhoff and Taylor, 2007).”
Currency Momentum Strategies (2012, unknown): “…fact that currency momentum studies generally do not analyze momentum in a cross-section of currencies but in the timeseries of single exchange rates, often framed as “technical trading rules”.6 This literature is surveyed in Menkhoff and Taylor (2007) and we will discuss it in more depth below.”
The use of technical analysis by fund managers: International evidence (2010, background): “Thus, results are consistent across countries and in line with findings for foreign exchange (Menkhoff and Taylor, 2007).”