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.
No takes yet. Share an insight, caveat, or question.
Chang et al. (1999) studied this question.
Synapse has enriched 5 related papers. Consider them for comparative context: