Exploiting trends in the foreign exchange markets

Abstract

We offer further evidence on the relevance of technical trading in exchange-rate markets using daily data for 95 currencies against the US dollar. To that end, we investigate the profitability of a simple technical trading rule based on Taylor's (1980) price trend model, generating optimal one-step-ahead forecasts of returns using genetic algorithms. These trading rules, that bear similarity to the popular trading rules based on moving averages, overcome the buy-and-hold strategy in 25 of 39 cases where trends are detected, even in the presence of transaction costs.