Technical trading rule profitability in currencies: It’s all about momentum

Recent academic and practitioner attention has focused on currency momentum. In this paper we replicate technical trading rules to assess their relationship with momentum. We find the effectiveness of technical trading rules falls significantly over time, with the mean Sharpe Ratio of our sample of portfolios falling from 0.66 in our in-sample period to 0.06 out-of-sample. Further, the returns do not survive modest transaction costs out-of-sample. We identify time series momentum as the single common factor driving returns across the range of strategies. Any abnormal return generated by technical trading rules is fully explained by time series momentum. [Display omitted] •The performance of technical trading rules has disappeared in an out of sample period from 1999 to 2020.•Evidence that currency markets have become more efficient over time and now incorporate technical trading rule information.•Multiple analysis techniques show time series momentum fully explains the returns to the range of technical trading rules.