Exchange rate determination with technical analysis indicators and microstructure approach

Abstract

The two approaches to exchange rate determination are presented in the article. After analyzing the previous research in microstructure approach ant technical analysis to exchange rate determination fields a model of the two information sources is composed. Dealer retail clients’ positioning ratio was chosen as a proxy for order flow information, two moving average indicators and a difference between them are used as technical analysis information source. While the purpose of the research is to show the exchange rate determination possibilities of the model, after performing linear regression for the three mostly traded exchange rates it is showed that the model can determine up to 54.4 per cent of the fluctuations in the exchange rates. The best results were obtained for the EUR/USD exchange rat, while the determination coefficients for USD/JPY and GBP/USD were 36.5 per cent and 40.5 per cent respectively.