Multiscale analysis of foreign exchange order flows and technical trading profitability

Nikola Gradojevic (1) , Camillo Lento

1 LEM - Lille économie management - UMR 9221

This paper investigates the multiscale (frequency-dependent) relationship between technical trading profitability and feedback trading effects in the Canada/U.S. dollar foreign exchange market. The results suggest that technical trading activities of financial customers drive frequent violations of the FX market microstructure assumption that exchange rate movements are driven by order flow. After controlling for transaction costs, we find that the contribution of financial customers in feedback trading dominates the contribution of non-financial customers, especially at lower frequencies. An additional, novel contribution is that technical indicators constructed from order flows can be profitable.

Mots clés: Foreign exchange markets; Order flows; Technical trading; Frequency domain

Domaines: Gestion et management

Nikola Gradojevic, Camillo Lento. Multiscale analysis of foreign exchange order flows and technical trading profitability. Economic Modelling, 2015, 47, pp.156--165. ⟨10.1016/j.econmod.2015.02.028⟩. ⟨hal-01563053⟩