Frank H. Westerhoff

Abstract
We seek to integrate flow traders into the chartist-fundamentalist approach. While chartists extrapolate past price trends to predict exchange rates, fundamentalists expect exchange rates to return towards their fundamental values. Flow analysis suggests going with the current order flow and thus enforces the impact of both chartists and fundamentalists. Within our behavioral setup, flow traders surprisingly always destabilize foreign exchange markets, that is they decrease the area in which the path of the exchange rate is stable and increase the amplitude of exchange rate movements.

JEL Classification
D84, F31

Keywords
Exchange rate dynamics; Flow, technical and fundamental analysis; Behavioral finance; Market microstructure; Order flow