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Methodical Madness: Technical Analysis and the Irrationality of Exchange-rate Forecasts
Article first published online: 25 DEC 2001
DOI: 10.1111/1468-0297.00466
Royal Economic Society 1999
1468-0297/asset/cover.gif?v=1&s=d4598d99c5d09047009e7e4c327fabf51190c85f "The Economic Journal")
Additional Information
How to Cite
Chang, P. H. K. and Osler, C. L. (1999), Methodical Madness: Technical Analysis and the Irrationality of Exchange-rate Forecasts. The Economic Journal, 109: 636–661. doi: 10.1111/1468-0297.00466
Publication History
- Issue published online: 25 DEC 2001
- Article first published online: 25 DEC 2001
- Abstract
- Cited By
Substantial empirical research documents that exchange-rate forecasts are not formed rationally. This paper identifies a common technical trading signal, the head-and-shoulders pattern, as a potential source of departures from rationality in exchange-rate forecasts. Forecasts based on this pattern are evaluated for daily dollar exchange rates over 1973 to 1994, using two criteria for rationality: profitability and efficiency. Resulting profits, replicable in real-time, are tested for statistical significance using a bootstrap technique. We find that the rule is profitable, but not efficient, since it is dominated by simpler trading rules.