CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

Which statement is true regarding technical analysis in the FX market?
A. Changes in net speculative positions usually lead changes in exchange rates.
B. Risk reversals are capable of confirming an exchange rate's trend.
C. Lagged order flow data can predict the short-term path that exchange rates will take, as most investors don't have access to such data.
Explanation: A is wrong. The size and trend in reported net speculative positions are not useful for currency forecasting purposes.

B is correct. However, risk reversals cannot predict changes in exchange rates.

C. Most studies find only weak predictive power from such order flow data.

User Contributed Comments 1

User Comment
SMcalister For B) There's no definition of a risk reversal inside the LOS. Reading up on the internet I see its the difference in volatility between put and call options on currencies to try to limit downside whilst protecting upside. I guess it can confirm a trend as it's coincidental.

For C) "Most studies find only weak predictive power from order flow data" weak predictive is still predictive. After all, hasn't ALL technical analysis been demonstrated to have little to no predictive power through academic studies. I suppose B) is more correct though.

I would also argue that A) can potentially also correct through the herding effect. If we're talking about technical analysis, we should consider behavioural psychology as well.
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