Apply the Breakout Detection Model to the Euro?
Posted in Volatility Effects
January 24, 2010
A reader suggested: “You might test the Bollinger Band- Keltner Channel breakout detection model on the euro. Equity indexes generally have performed anti-trend (reversion to the mean) whereas currencies have trended.”
Inserting daily CurrencyShares Euro Trust (FXE) history for 12/12/05-1/13/10 into the model generates no breakout signals over the four-year sample period. Perhaps FXE does not have enough volatility or change in volatility for the model/specified parameters to work.
It seems most of the relevant studies on equity returns indicate short-term reversion, medium-term momentum and long-term reversion. See “What Works Best?” for discussion of medium-term and long-term effects and, for example, “Why the Skip-period in Momentum Strategies?” for discussion of the short-term effect.
