Simple Technical Trading Rules and the Stochastic Properties by Blake LeBaron

Simple Technical Trading Rules and the Stochastic Properties by Blake LeBaron

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Forex Trading – Foreign Exchange Course

You want to learn about Forex?

Foreign exchange, or forex, is the conversion of one country’s currency into another.
In a free economy, a country’s currency is valued according to the laws of supply and demand.
In other words, a currency’s value can be pegged to another country’s currency, such as the U.S. dollar, or even to a basket of currencies.
A country’s currency value may also be set by the country’s government.
However, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation.

This paper tests two of the simplest and most popular trading rules–moving average and trading range break–by utilizing the Dow Jones Index from 1897 to 1986. Standard statistical analysis is extended through the use of bootstrap techniques. Overall, their results provide strong support for the technical strategies. The returns obtained from these strategies are not consistent with four popular null models: the random walk, the AR(1), the GARCH-M, and the Exponential GARCH. Buy signals consistently generate higher returns than sell signals, and further, the returns following buy signals are less volatile than returns following sell signals. Moreover, returns following sell signals are negative, which is not easily explained by any of the currently existing equilibrium models. Copyright 1992 by American Finance Association.

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