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The profitability of technical analysis: Evidence from the piercing line and dark cloud cover patterns in the forex market

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  • Ahmed S. Alanazi
  • Ammar S. Alanazi
  • David McMillan

Abstract

We examine 112,792 daily candles using more than one million spot quotes among 24 currency pairs between 2000 and 2018. We find that chart patterns are profitable. Relying on these visually based patterns achieves returns of more than 600% after accounting for the transaction costs. Nevertheless, the transaction costs are substantial. In particular, the spread is a large burden on profitability. Overall, our evidence suggests that technical analysis could generate excess returns and that the profitability of technical analysis cannot be explained by market inefficiency. Rather, the evidence is consistent with that on the link between the efficiency and profitability of technical analysis.

Suggested Citation

  • Ahmed S. Alanazi & Ammar S. Alanazi & David McMillan, 2020. "The profitability of technical analysis: Evidence from the piercing line and dark cloud cover patterns in the forex market," Cogent Economics & Finance, Taylor & Francis Journals, vol. 8(1), pages 1768648-176, January.
    • Handle: RePEc:taf:oaefxx:v:8:y:2020:i:1:p:1768648
    DOI: 10.1080/23322039.2020.1768648
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    Cited by:

    1. Francesco Carlier, 2021. "A Simple Options Trading Strategy based on Technical Indicators," International Journal of Economics and Financial Issues, Econjournals, vol. 11(2), pages 88-91.

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