Lessons from the evolution of FX strategies

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Christopher J. Neely and Paul A. Weller of the Federal Reserve Bank of St. Louis study how trading strategies can evolve for a hypothetical trader who chooses portfolios from FX technical rules in major and emerging markets, the carry trade, and U.S. equities. The results show that a backtesting procedure to choose optimal portfolios improves upon the performance of nonadaptive rules. We also find that forex trading alone dramatically outperforms the S&P 500, with much larger Sharpe ratios over the whole sample.