introduces the subject of technical analysis in the foreign exchange
market, with emphasis on its importance for questions of market
efficiency. “Technicians” view their craft, the study of price patterns,
as exploiting traders’ psychological regularities. The literature on
technical analysis has established that simple technical trading rules
on dollar exchange rates provided 15 years of positive, risk-adjusted
returns during the 1970s and 80s before those returns were extinguished.
More recently, more complex and less studied rules have produced more
modest returns for a similar length of time. Conventional explanations
that rely on risk adjustment and/or central bank intervention do not
plausibly justify the observed excess returns from following simple
technical trading rules. Psychological biases, however, could contribute
to the profitability of these rules. We view the observed pattern of
excess returns to technical trading rules as being consistent with an
adaptive markets view of the world.