Technical Trading and Trends in the Dollar-Euro Exchange Rate

The study explores the pattern of exchange rate dynamics based on the dollar-euro rate. It documents the performance of technical trading systems in this market, and it analyses the impact of technical trading on exchange rate dynamics. The main results are as follows: First, exchange rates fluctuate around "underlying" short-term trends. Over an extended period of time, short-term trends last longer in one direction than in the other. The accumulation of these runs result in long-term appreciation or depreciation trends. Second, the 2,265 technical models based on daily data would have produced an average gross rate of return of 4.2 percent per year when trading the dollar-euro rate between 1999 and 2006. The 2,466 models based on 30-minutes data perfom worse than the daily models. However, those 25 models, which performed best over the most recent sub-period, would have produced over the subsequent period a gross return of 8.2 percent per year. Third, the aggregate transactions as well as open positions of technical models exert an excessive demand (supply) pressure on currency markets. When the models produce trading signals, they are either buying or selling, when they maintain open positions, almost all of them are on the same side of the market, either long or short.