FX technical trading rules can be profitable sometimes! |
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| Affiliation: | 1. Essex Business School, University of Essex, Colchester CO4 3SQ, UK;2. Gustavson School of Business, University of Victoria, Victoria V8P 5C2, Canada;3. Essex Finance Centre, UK;1. Hull University Business School, University of Hull, Hull, UK, HU6 7RX;2. Centre of Computational Finance and Business Analytics, Southampton Business School, University of Southampton Southampton, SO17 1BJ, United Kingdom;1. IÉSEG School of Management (LEM-CNRS), Lille Catholic University, 3, rue de la Digue, 59000 Lille, France;2. Faculty of Business Administration, Lakehead University, 955 Oliver Road, Thunder Bay, Ontario P7B 5E1, Canada |
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| Abstract: | This paper investigates the profitability of technical trading rules in the foreign exchange market taking into account data snooping bias and transaction costs. A universe of 7650 trading rules is applied to six currencies quoted in U.S. dollars over the 1994:3–2014:12 period. The Barras, Scaillet, and Wermers (2010) false discovery rate method is employed to deal with data snooping and it detects almost all outperforming trading rules while keeping the proportion of false discoveries to a pre-specified level. The out-of-sample results reveal a large number of outperforming rules that are profitable over short periods based on the Sharpe ratio. However, they are not consistently profitable and so the overall results are more consistent with the adaptive markets hypothesis. |
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