Currency Orders and Exchange Rate Dynamics: An Explanation for the Predictive Success of Technical Analysis

Authors

  • Carol L. Osler

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    • Osler is an Associate Professor at Brandeis University. The views expressed in the paper are those of the author and do not necessarily reflect views at the Federal Reserve Bank of New York or the Federal Reserve System. The author thanks The Royal Bank of Scotland, formerly National Westminster Bank, for providing the orders data. This paper has benefited extensively from thoughtful comments by an anonymous referee, as well as comments from Franklin Allen, Jose Campa, John Carlson, Rick Green, Keith Henthorn, Charles Himmelberg, Rich Lyons, Jim Mahoney, and Chris Neely. The author thanks Gijoon Hong and Priya Gandhi for excellent research assistance. Errors or omissions remain the responsibility of the author.

Abstract

This paper documents clustering in currency stop-loss and take-profit orders, and uses that clustering to provide an explanation for two familiar predictions from technical analysis: (1) trends tend to reverse course at predictable support and resistance levels, and (2) trends tend to be unusually rapid after rates cross such levels. The data are the first available on individual currency stop-loss and take-profit orders. Take-profit orders cluster particularly strongly at round numbers, which could explain the first prediction. Stop-loss orders cluster strongly just beyond round numbers, which could explain the second prediction.

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