Exploiting trends in the foreign exchange markets

Abstract

We offer further evidence on the relevance of technical trading in exchangerate 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-stepahead 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.