The profitability of the Technical Analysis

Monja Welp

Diplomová práce

Anotace:

Previous studies do not provide consistent results regarding the profitability of technical trading rules in the foreign exchange market. While many studies using data up to the early 1990s report significant abnormal returns, more recent studies provide evidence that technical trading profits have declined over decades. This paper provides a comprehensive empirical investigation on the profitability of technical trading rules. Using daily data over a sample period of 15 years from 2006 to 2020, a universe of 110 rules is applied to two currencies quoted against U.S. dollar including one developed market currency (Euro) and one emerging market currency (Mexican Peso). Results show that profit opportunities from trading rules for both currency markets still exist, although these profits vary among currencies, between different strategies and among sub samples. Findings suggest that rules based on more complex indicators perform better and the performance for both traditional and more complex rules is greater in the emerging currency market. A sub sample analysis also provides evidence of an upward trend in the performance of trading rules for the Mexican Peso, while for the Euro an increasing profitability is documented for complex rules and a downward trend for traditional rules. The findings can be explained from a microstructure perspective and are consistent with the adaptive market hypothesis.

Abstract:

Previous studies do not provide consistent results regarding the profitability of technical trading rules in the foreign exchange market. While many studies using data up to the early 1990s report significant abnormal returns, more recent studies provide evidence that technical trading profits have declined over decades. This paper provides a comprehensive empirical investigation on the profitability of technical trading rules. Using daily data over a sample period of 15 years from 2006 to 2020, a universe of 110 rules is applied to two currencies quoted against U.S. dollar including one developed market currency (Euro) and one emerging market currency (Mexican Peso). Results show that profit opportunities from trading rules for both currency markets still exist, although these profits vary among currencies, between different strategies and among sub samples. Findings suggest that rules based on more complex indicators perform better and the performance for both traditional and more complex rules is greater in the emerging currency market. A sub sample analysis also provides evidence of an upward trend in the performance of trading rules for the Mexican Peso, while for the Euro an increasing profitability is documented for complex rules and a downward trend for traditional rules. The findings can be explained from a microstructure perspective and are consistent with the adaptive market hypothesis.

Klíčová slova

technical analysis, technical trading rules, foreign exchange, exchange rate, adaptive market hypothesis, microstructure approach

Keywords

technical trading rules, foreign exchange, exchange rate, adaptive market hypothesis, microstructure approach, technical analysis

Jazyk práce: angličtina

Datum vytvoření / odevzdání či podání práce: 29. 4. 2022

Obhajoba závěrečné práce

• Obhajoba proběhla 1. 6. 2022
• Vedoucí: Karel Brůna
• Oponent: Viktar Dudzich

Vysoká škola ekonomická v Praze

Magisterský studijní program:
Finance and Accounting