Investigating the profitability of technical analysis systems on foreign exchange markets

Reviews previous research on exchange rate forecasting, identifies some problems in building a predictive model and examines the profitability of using various technical rules (as used by traders) in the USD/DM and USD/BP foreign exchange markets. Takes 1989‐1996 data, divided into two sub‐periods with different macroeconomic features; and compares the results from the technical rules in detail and with a buy and hold strategy. Finds that no rules produced statistically significant profits for the whole period (although they did for the first sub‐period) and some evidence that buy and hold is superior, especially if risk is taken into account. Considers the implications of the findings and the underlying reasons for them.