Methodical Madness: Technical Analysis and the Irrationality of Exchange-rate Forecasts

Authors: Chang, P. H. K.¹; Osler, C. L.²

Source: The Economic Journal, Volume 109, Number 458, October 1999 , pp. 636-661(26)

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Abstract:

Substantial empirical research documents that exchange-rate forecasts are not formed rationally. This paper identifies a common technical trading signal, the head-and-shoulders pattern, as a potential source of departures from rationality in exchange-rate forecasts. Forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994, using two criteria for rationality: profitability and efficiency. Resulting profits, replicable in real-time, are tested for statistical significance using a bootstrap technique. We find that the rule is profitable, but not efficient, since it is dominated by simpler trading rules.

Document Type: Original article

DOI: http://dx.doi.org/10.1111/1468-0297.00466

Affiliations: 1: Credit Suisse First Boston, New York, 2: Federal Reserve Bank of New York

Publication date: 1999-10-01