Pivot Point Trading in the Foreign Exchange Market - A Test for Market Efficiency

Abstract: The foreign exchange (FX) market is today the world’s broadest, most active, financial market. One of many technical analysis techniques amongst professional FX traders, trying to narrow down the best entry and exit points in this market, is to utilize pivot points. The ability of this technique has, as far as we know, never been rigorously evaluated. In collaboration with the Malmö-based hedge fund Century Analytics, we undertake such a test. The purpose is to investigate if this technique can help predict intraday interruptions for exchange rates. To this end, we apply both a trading strategy approach with the aim of establishing whether or not a certain trading strategy gives rise to exploitable profit opportunities, and a bootstrap resampling method. Studying three pairs of currencies, we find that the predictive power of applied pivot points varies across the pairs. Our main result is that we find no support for the hypothesis that pivot points reveal useful information in their traditional way about intraday price patterns in the FX market. Instead, our findings show that the technique can be profitable if it is implemented inversely for two of the pairs.