Do Foreign Exchange Markets Still Trend?

Abstract

Is it possible to profitably trade trends in foreign currencies? We examine the major currency futures contracts which have been trading since the 1970s as well as more recent contracts on exotic currencies that have only begun to trade in the past few years. The main conclusion is that the era of easy profits from simple trend following strategies in major foreign currencies is over. The markets have adapted to the extent that profits from these simple trading strategies have vanished. Presumably, trending may be a feature confined to currencies in the early years of a floating rate regime. When we look at some newly trading currencies, we see more attractive profit opportunities. Newly trading currency futures prices, like their counterparts thirty years ago, appear susceptible to trend following trading strategies.3

Predictability and 'Good Deals' in Currency Markets

“…Beginning with Shafer (1976, 1984) and continuing with Sweeney (1986), Levich and Thomas (1993), Neely, Weller and Dittmar (1997), Chang andOsler (1999), Gencay (1999), LeBaron (1999), Olson (2004), and Schulmeister (2006), among others, this evidence casts doubts on the simple efficient market hypothesis, even though it is not incompatible with efficient markets under time-varying risk premia and predictability induced by time-varying expected returns. More recently, however, and contrary to the bulk of these earlier findings, Pukthuanthong, Levich and Thomas (2007) find 3 evidence of diminishing profitability of currency trading rules over time. In a comprehensive re-evaluation of the evidence hitherto provided by the extant literature, Neely, Weller and Ulrich (2007), also find evidence of declining profitability of technical trading rules.…”

“…While such violations are especially severe in the initial part of the sample period, excesspredictability has not disappeared from the mid-1990s onwards, in contrast with the vanishing profitability of many popular technical trading rules reported in some recent studies, e.g. Neely, Weller and Ulrich (2007) and Pukthuanthong, Levich and Thomas (2007). Importantly, we find that predictability varies over time in a roughly cyclical manner with recurring albeit relatively short-lived episodes during which it 5 exceeds the no good-deal upper bound.…”

Exchange rate expectations of chartists and fundamentalists

“…The difference may be important in our study, because we cover the major exchange rates over the last decade, i.e. a case where earlier studies show that simple momentum trading does not work profitably (Pukthuanthong, Levich, and Thomas III, 2007;Menkhoff, Sarno, Schmeling, and Schrimpf, 2012). Second, it seems interesting to control results for the attractively high returns from carry trades (see survey by Burnside, 2011).…”

Assessing the Efficacy of Adjustable Moving Averages Using ASEAN-5 Currencies

“…Nevertheless, many have also highlighted the existence of a slow-moving downtrend for this kind of profitability over the last decade [24], [25], [26]. It can be seen that, as time passes, the direction of price changes converges to fit a geometric distribution [27].…”

“…It can be seen that, as time passes, the direction of price changes converges to fit a geometric distribution [27]. To outperform the passive buy-and-hold in foreign exchange markets, increasingly complicated trading rules are needed [24], which might be a consequence of increasingly efficient market conditions in these markets [24], [25], [26], [27], [28], [29], [30]. If this were true, no profitable position could be gained from trading rules or technical analysis, since the prices of these markets would already reflect all relevant information [16].…”