Using illustrative graphs show how the following technical trading rules operate in forecasting currency rates A)...

Using illustrative graphs show how the following technical trading rules operate in forecasting currency rates

A) Moving average model

B) The filter rules model

Expert Solution

A) Moving Average Model

A variety of mechanical trading rule is the “moving average” class. Moving averages bypass the short-run zigs and zags of the exchange rate to permit the technician to examine trends in the series. A moving average is the average closing price of the exchange rate over a given number of previous trading days. The length of the moving average “window (the number of days in the moving average) governs whether the moving average reflects long- or short-run trends. Any moving average will be smoother than the original exchange rate series, and long moving averages will be smoother than short moving averages.

B) The Filter Rules Model

A well-known type of mechanical trading rule is the “filter rule,” or “trading range break” rule which counsels buying (selling) a currency when it rises (falls) x percent above (below) its previous local minimum (maximum). The size of the filter, x, which is chosen by the technician from past experience, is generally between 0.5 percent and 3 percent.

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Using illustrative graphs show how the following technical trading rules operate in forecasting currency rates A)...

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