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The Role Of Technical Analysis In The Foreign Exchange Market

Author

Listed:
  • Bernardo Quintanilla García
  • Jesús Cuauhtémoc Téllez Gaytán
  • Lawrence A. Wolfskill

Abstract

This paper provides evidence that currency spot prices are autocorrelated, which indicates that technical analysis in foreign exchange trading can and should take a leading role for analyzing expected exchange rate movements. The Augmented Dickey-Fuller test was used to test the Random Walk Hypothesis on the USD/CHF exchange rate prices in a one minute frequency timeline for 10 randomly selected Fridays. Under the Extreme Values Method, calculations were based on the High-Low ask price spread and not on the volatility of closing prices. The main contribution of this paper is that new evidence is generated providing reasonable basis to discard the Efficient Markets Hypothesis in its weak form. The findings lead to embracing the Dow Theory, rather than the Random Walk approach, and conclude that markets are not efficient in their weak form.

Suggested Citation

  • Bernardo Quintanilla García & Jesús Cuauhtémoc Téllez Gaytán & Lawrence A. Wolfskill, 2012. "The Role Of Technical Analysis In The Foreign Exchange Market," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 6(3), pages 17-22.
    • Handle: RePEc:ibf:gjbres:v:6:y:2012:i:3:p:17-22
    as

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    References listed on IDEAS

    as
    1. Longworth, David, 1981. "Testing the Efficiency of the Canadian-U.S. Exchange Market under the Assumption of no Risk Premium," Journal of Finance, American Finance Association, vol. 36(1), pages 43-49, March.
    2. Anat R. Admati, Paul Pfleiderer, 1988. "A Theory of Intraday Patterns: Volume and Price Variability," The Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 3-40.
    3. Parkinson, Michael, 1980. "The Extreme Value Method for Estimating the Variance of the Rate of Return," The Journal of Business, University of Chicago Press, vol. 53(1), pages 61-65, January.
    4. Yue Fang, 2000. "Seasonality in foreign exchange volatility," Applied Economics, Taylor & Francis Journals, vol. 32(6), pages 697-703.
    5. Bollerslev, Tim & Domowitz, Ian, 1993. "Trading Patterns and Prices in the Interbank Foreign Exchange Market," Journal of Finance, American Finance Association, vol. 48(4), pages 1421-1443, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    price range; volatility; Dow Theory; random walk; foreign exchange; weak form market efficiency;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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