The significance of technical trading-rule profits in the foreign exchange market: a bootstrap approach

Abstract

In this paper, we present new evidence on the profitability and statistical significance of technical trading rules in the foreign exchange market. We utilize a new data base, currency futures contracts for the period 1976-1990, and we implement a new testing procedure based on bootstrap methodology. Using this approach, we generate thousands of new exchange rate series constructed by random reordering of each original series. We then measure the profitability of the technical rules for each new series. The significance of the profits in the original series is assessed by comparison to the empirical distribution of results derived from the thousands of randomly generated series. Overall, our results suggest that simple technical trading rules have very often led to profits that are highly unusual. Splitting the entire 15-year sample period into three 5-year periods reveals that on average the profitability of some trading rules declined in the 1986-1990 period although profits remained positive (on average) and significant in many cases.

The profitability of carry trades

“…Crucially, if UIP holds, then the returns on each of the investment strategies that we analyse should not be consistently superior to those derived from other foreign exchange investment strategies or superior to just holding one's capital in pounds over time. While Levich and Thomas (1993) have conducted profitability tests of technical trading rules, there surpringly been little testing of the UIP condition from a profitability perspective. We now outline two basic tests of UIP before we look at two further tests based upon a carry trade perspective.…”

“…In particular, we investigate the empirical relevance of the failure of UIP for carry trades. While there have been numerous studies that look at the profitability of different filter and technical trading rules such as Sweeney (1986) and Levich and Thomas (1993) it is surprising that there has not been any investigation of the economic significance of the empirical failure of the UIP condition for the profitability of carry trades.…”

Evolving technical trading rules for spot foreign-exchange markets using grammatical evolution

“…Greatest use was made of this information in forming short-run (a trading horizon of less than three months) exchange rate expectations. In the case of foreign-exchange markets, studies which suggest that technical trading strategies may be profitable include Sweeney (1986) and Levich and Thomas (1993). Further support for a technical analysis argument is found in Osler (2003), where evidence of clustering of currency stop-loss and take-profit orders is noted.…”

“…The dollar interest rate is earned on these funds. A trading cost c of 0.025% and a slippage allowance of 0.01% in each (single) direction is included (Levich and Thomas, 1993).…”

Bootstrap Approaches to Autoregressive Model on Exchange Rates Currency

“…Several years later, [26] [27] has proposed the bootstrap method in his study for a new test of exchange rate profitability's random nature of mechanical trading rules which is also known as the generation of thousands new series for false exchange rates.…”