Are Technical Trading Rules Profitable? Evidence for Head-and-Shoulder Rules1

The profitability of chartist trading rules on foreign exchange markets is still under debate. Since simple technical trading rules may not adequately capture the complex phenomenon of chartist trading, this paper focuses on the prominent head-and-shoulder pattern as a representative trading rule which incorporates various „technical“ ideas such as smoothed trends, trend reversal, resistance levels, and volatility clustering. For various combinations of the building blocks of head-and-shoulder definitions the result is generally negative: Returns to head-and-shoulder trading rules are not significantly positive and if there is any evidence for non-zero returns at all, then it is is evidence for negative returns. JEL: F31, F33, g14, G15