Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/22464
Authors: 
Menkhoff, Lukas
Taylor, Mark P.
Year of Publication: 
2006
Series/Report no.: 
Diskussionspapiere des Fachbereichs Wirtschaftswissenschaften, Universität Hannover 352
Abstract: 
Technical analysis involves the prediction of future exchange rate (or other asset-price) movements from an inductive analysis of past movements. A reading of the large literature on this topic allows us to establish a set of stylised facts, including the facts that technical analysis is an important and widely used method of analysis in the foreign exchange market and that applying certain technical trading rules over a sustained period may lead to ignificant positive excess returns. We then analyze four arguments that have been put forward to explain the continuing widespread use of technical analysis and its apparent profitability: that the foreign exchange market may be characterised by not-fully-rational behaviour; that technical analysis may exploit the influence of central bank interventions; that technical analysis may be an efficient form of information processing; and finally that it may provide information on non-fundamental influences on foreign exchange movements. Although all of these positions may be relevant to some degree, neither non-rationality nor official interventions seem to be widespread and persistent enough to explain the obstinate passion of foreign exchange professionals for technical analysis.
Subjects: 
foreign exchange market
technical analysis
market microstructure
JEL: 
F31
Document Type: 
Working Paper

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