Is Trend Following in Foreign Exchange Markets Going Out of Fashion?

Pierre Lequeux

Foreign exchange markets, as for many other financial markets, are characterised by the occurrence of price trends. These have been demonstrated by the literature to be a significant source of returns for active currency managers. Levich and Thomas (1993a, 1993b) provided evidence of the profitability of technical trading rules applied to currencies over the period 1976–1990, and concluded that technical trading rules offered an improved risk–return opportunity set for international investors. Using monthly data covering the period 1976–2011 for 48 countries, Menkhoff et al. (2012) also found that momentum currency strategies generated excess returns of up to 10% per year, while noting that those returns were highly time-varying. In a related study, Billingsley and Chance (1996) noted that close to 70% of commodity trading advisors in the US were trend followers, and tended to trade in a similar manner. This highlights the significant reliance of active managers on price trend models to fulfil their investment objectives. The evidence of trends and patterns from which one can derive economic profits contradicts the efficient market hypothesis put forward by Fama (1970) as it