PDF《Technical Analysis》

Taylor, 1995). Hence, the suggestion of Malkiel (1996), that Technical strategies are usually amusing, often comforting, but of no real value is perhaps a little too dismissive, and this has been recognised by a number of researchers.2 Indeed, over the past twenty years or so, international financial economists have increasingly turned their attention to the study of technical analysis in an attempt to understand both the behaviour of foreign exchange rates and the behaviour of foreign exchange market participants;

so much so, in fact, that quite an extensive literature has developed on this topic. Although the literature on the application of technical analysis to the foreign exchange market is sufficiently developed to warrant a survey of its own, however, the foreign exchange market cannot be viewed in total isolation from other financial

1 In other words, the ratio of expected return to risk (the volatility of returns) is unacceptably low.

2 As we discuss in more detail below, Malkiel'

s dismissive treatment of technical analysis is at odds with the evidence that technical analysis is widely used by financial market traders.

3 markets, and so we occasionally stray into the literature on the application of technical analysis to financial markets more generally and to equity markets in particular. The foreign exchange market differs from equity markets in some important aspects, however. First, total turnover in the global foreign exchange market is very high, at some 2,000 billion US dollars per day (Bank for International Settlements, 2005), which is several times greater than the combined daily turnover of the largest stock exchanges in the world.3 Second, foreign exchange markets consist almost entirely of professional traders (Sager and Taylor, 2006), so that the impact of individual private investors may be neglected without loss of generality (in contrast to equity markets― see, e.g., Griffin, Harris and Topaloglu, 2003). Third, the share of short-term interdealer trading is much higher in the foreign exchange market than it is in stock markets (Lyons, 2001). Finally, one can probably say that there is less confidence among traders in models of fair value in the foreign exchange market compared to equity markets (Frankel and Rose, 1995;

Taylor, 1995;

Campbell, Lo and MacKinlay, 1996). The greater lack of consensus in models of fair value in the foreign exchange market and the greater concentration on shorter trading horizons might suggest that the use of technical analysis would be more popular in the foreign exchange market, although the high proportion of professional traders and deeper liquidity of the foreign exchange market might suggest the opposite. However, we do not want to dwell too long on the differences between the foreign exchange market and equity markets, but rather emphasise the fact that foreign exchange is increasingly seen as a separate asset class (Snyder, 2005). In this paper, we provide a selective and critical overview of the literature on technical analysis in the foreign exchange market. At the forefront of our discussion throughout is the question as to why technical currency analysis is so intensively and widely used by foreign exchange professionals. As an organising device, we develop a set of stylized facts concerning the importance and profitability of technical

3 Comparing spot market turnover yields a ratio of about three in favour of the foreign exchange market compared to equities. We calculate this by taking daily spot trading in equities and currencies in 2004-5 in the seven largest asset trading centres in the world. For equities these were the New York Stock Exchange, Nasdaq, the London Stock Exchange, the Tokyo Stock Exchange, Euronext (Paris, Brussels, Amsterdam, Lisbon), the Deutsche B?rse (Frankfurt) and the Bolsas y Mercados Espa?oles (Spain) (see the website www.world-exchanges.org), while for foreign exchange the major centres were London, New York, Tokyo, Singapore, Frankfurt, Hong Kong and Sydney (Bank for International Settlements, 2005). In these centres, daily spot market turnover was about