Aggregate Trading Behavior of Technical Models and the Yen/Dollar Exchange Rate

The study analyses the interaction between the trading behaviour of 1,024 moving average and momentum models and the fluctuations of the yen/dollar exchange rate. The paper shows first that these models would have exploited exchange rate trends quite profitably between 1976 and 1999, and then that the aggregate transactions and positions of technical models exert an excess demand pressure on currency markets since they are mostly at the same side of the market. When technical models produce trading signals they are either buying or selling; when they maintain open positions they are either long or short. A strong interaction prevails between exchange rate movements and the transactions triggered by technical models. An initial rise of the exchange rate due to news, e.g., is systematically lengthened through a sequence of technical buy signals.