Technical Analysis
Forecasting foreign exchange market is not only on the basis of any or several of the fundamental factors, but also with the help of various tools of technical analysis.Technical analysis is the analysis of market movements over the previous periods. Recently, more and more traders to attach primary importance to the methods of technical analysis.
Basic tools:- The graph bars;- Graph <noughts and crosses>;- Candlesticks;- Oscillators;- Moving average (Moving Average - MA).
The controversy about the usefulness of technical analysis of markets as well dominates the minds and as inexhaustible as the dispute about the primacy of matter. One can understand the painful and uncertain in a society where to find the support it gets from the gloomy corners of memory beliefs, the failure of which, apparently, had long been in need of argument. Where are offensive, when the economic and journalism practice, the banner which should be rational, are beginning to pay attention to exceptional approaches, at least in academic circles considered to be a logical suspect. Of course, one could argue that the public needs to know about everything, including alternative methods. But when in the professional literature has not dried up the flow of publications, with a sincere reverence responding about technical analysis;Investment consultants presented with the investors as it is perhaps the only sound method of market research;Developers of software investment is proud to warn about the implementation of the new version has more years of proven techniques;Almost nowhere says that a reasonable application of technical analysis requires a considerable number of reservations, the most iron patience comes to an end.According to one of the most widely used definitions, technical analysis (TA) - a set of methods to determine the right moment to buy or sell any assets (usually securities or currencies) on the basis of analysis of price trends and trading volumes. The main objective - to identify the signals that would help predict the change "moods" of the market.
Typically, methods of TA based on the previously observed "patterns" of the dynamics of market parameters, as well as the psychological characteristics of the trading community. TA Followers believe that the changes in the market for only 10% are subject to logic, and by 90% due to psychological factors. Therefore, predicting, as in the mass market participants will act, or "mob" who mastered the TA, "the poet" can achieve brilliant investment results.TA is closely related to the construction and study of various charts and graphs, so it is often called the Chartists agents (from the English chart - chart, not to confuse the British proletarians, the followers of the revolutionary movement in the mid-XIX century). With many typical "picture", indicating, according to the Chartists, the imminent occurrence of a particular market situation, they try to play on a short-term price movements, neglecting, as a rule, long-term objectives, If we consider the method of the TA in its pure form, its followers do not care what industry or firm is under investigation action, as long as she gave those same signals.A new strong impetus to the development of the TA was in an era of global computerization. Plotting and complex calculations of indicators, indexes, and oscillators, which previously had to be done literally in the display. No wonder Arsenal (and aplomb) Chartists it has grown significantly in recent years, a new generation of technology added to them a lot of charm and a kind of mysticism.
Oddly enough, but even the most sophisticated methods of technical analysis is usually not in any way be justified, except truisms like "history repeats itself". By opening a phenomenon Chartists met him outside, not at all trying to find him an explanation. Moreover, among some representatives of this theory are of the opinion that the mechanism of action of the theory are of the opinion that the market mechanism of action is incomprehensible, in other words, we'll never know "why" we can only hope to understand the "how."
Nevertheless, we can not completely deny the technical analysis in the presence of certain basement (mainly this concerns the stability of trends). Firstly, it is quite natural idea to play on the prejudices and the herd instinct "of the crowd." If, for example, we know that non-professional investors in this situation, do so-and-so is possible in principle to predict the direction of the market, for example, any shares may stimulate its acquisition, which leads to further strengthen the trend. Economists call this effect self-fulfilling prophecy, ie, self-fulfilling expectations. Second, information is always distributed evenly and is first in some market players (insiders) and then the other. Often it is the process of diffusion of new information causes a further development of the emerging trends. Finally, if we talk about changing the direction of market movement, the Chartists argue that people tend to remember the price they paid (or would be willing to pay) per share. With this argument (and only!) Became the generally accepted notion of justified "resistance level" (support) and many classical forms of technical diagrams: implementation of the previous price high (or low) forces the investor to sell (buy), which should lead to a reversal. But against these (rather naive, by the way) a lot of explanations can be advanced no less compelling reasons. First, a purely psychological factor as the professionalization of markets means less and less. Second, the trend may change and often actually changing much faster than the analyst is able to read at least some signal. Third, even assuming that the effective methods of technical analysis, the more people enjoy it at the same time, the lower their chances to capitalize. Fourth, with the spread of such practices among traders have an incentive not to wait for the appearance of direct technical signal, and try to act in advance. This can not distort the relevant principle of technical analysis, signal integrity violation (of course, again, if you believe in its existence). Finally, if someone is confident that tomorrow the price should rise by 20%, the liquid market, where prices reflect information almost instantly, it will inevitably happen today. Realizing the weakness of their position, the moderate Chartists go back down and called technical refinements complement the elements of fundamental analysis (ie, studies of "internal" value of the asset). True, it is not clear how increasing the value of such a symbiosis through proper TA.
It's time to move on to implicitly postulated basic principle of Chartism, to which all of the above simply pales: the market has a memory, or, if you will, the inertia, ie knowledge of price dynamics in the past can help predict the future. In particular, it is believed that if the price rose yesterday, today it is more likely to rise than fall (it is the ideology of the so-called signal strength of the market). The position is exactly the opposite of economic theory: the prices are subject to the so-called random walk (random walk). Simplifying, we can model the price process as follows: at each time throws a coin and, depending on the result of throwing the price can move up or down with equal probability. Thus, each next step is totally unpredictable in terms of what happened earlier.Initially, as a popular illustration of the random walk route drinkers cited in the open field. This route is irrational and unpredictable.
By the way, if by means of experiments to construct a random price series, then they can make any favorite Chartists form. Of course, from this point of view, technical analysis is completely absurd. Note that unlike the other uncertainties present dispute is easily resolved with a simple statistical test, calculating the autocorrelation of prices with different time lags. If these autocorrelations for some time periods will be significantly different from zero, there will be only sprinkle ashes on his head and recognize the absolute truth of the Chartists. But alas, they, for the vast majority of markets it is not. (In fairness, we note that the random walk hypothesis is also often can not find direct evidence, but not denied. The question of a more complex non-linear dependence is still open).By the way, if the computers are armed to the teeth, the Chartists, they also become an invaluable tool for exposing the TA. Posteriori estimates have helped to expose dozens of so-called methods, which are showing remarkable results in some periods of time, completely denied to others.
Besides the logical and empirical arguments against the TA, there is the "life". Many can convince the following fact: although in principle at the expense of successful operations in the financial markets work and professional beliefs, among them very hard to find Chartist. It would seem, people familiar with the recipes win, must first enjoy them yourself, but do not share their invaluable knowledge with others: in short, if you are so smart, why are so poor?The sleep of reason produces costsThere certainly astute reader asks: "If the situation is really all so hopeless for the TA, what then caused his undying popularity?"First of all, no one argues that technical analysis is absolutely sterile and will never make a profit. No, in fact so often the case, but, unfortunately, no more than using a simple investment strategies (especially if you consider taxes and fees). This conclusion is also repeatedly confirmed empirically.
Secondly there are reasons to psychological effects.
1. TA is simple, is extremely varied (if not raznoshersten) and maximum algorithmized. This provides ease of application, persistence approach in general in the refusal of its individual components and removes the analyst responsible for any errors.
2. TA - is the straw, which is enough for investors, desperate to understand the mechanisms of functioning of financial markets. This factor is especially significant if you are unavailable adequate basic information and / or the inability to treat her.This is sufficient to effect the technical analysis in some sectors of the market is constantly growing. Thus, according to polls Euromoney, in 1979 90% of forecast agencies in investigations of exchange rates were based on fundamental analysis, and ten years later more than a third of respondents used only the TA! According to the Bank of England, 90% of the leading dealers of the foreign exchange market in London in one way or another use of TA.In general, the foreign exchange market is the least among economists 'rational'. One reason is that the major operators in this market are central banks that are in active foreign exchange intervention, often caused by non-economic (ie, irrational from the standpoint of fundamental analysis), considerations. There are other factors impeding the implementation of the price of "efficiency" of the currency market, resulting in the exchange rates at times deviate significantly from the values dictated by fundamental factors.
In such circumstances, the use of techniques to forecast changes in exchange rates is desirable. The more investors believe in the technical signals, consistent with them, the better the work we have already noted the effect of self-expectations. And although in the long run exchange rates and quotes undoubtedly gravitate to the fundamental values, even the most rational investor can not ignore the presence in the market Chartists.In fact, it has two fundamental ways to profit: with the "crowd" to exploit short-term trends, using the methods of technical analysis, or play against the market, hoping to reverse roll back prices. Most chose the first option. But why rational investors that focus on long-term fundamental criteria, do not try to beat the big acting irrationally Chartists, just as the former George Soros 'punish' the BoE? Unfortunately, this requires a lot of money, the ability to bind to relatively long periods of time, and finally, every big game fraught with serious risks. Meanwhile, the majority of leading institutional investors and to the recent scandals (Barings, Daiwa) prohibit its traders to keep an open foreign exchange position more than a day, and more recently by simply vigilant monitoring of their actions. Limited funds, risk aversion and short-term orientation of the fundamental forced investors - that's where the invincibility of the reasons lie more Chartists.The most notorious cynics believe that the TA has survived mainly because it leads investors to work actively on the market. A further operation - it is unnecessary brokerage fees. Abuse also technical analysis is easy if only because all of voluptuousness pounce on naive chart, invented by old Dow hundred years ago. This is not surprising: they (and others like them) with the manic persistence reproduce all books and pamphlets. But it's like to blame medicine for what its medieval methods were powerless to halt the plague and cholera.
To understand the current state of technical analysis, not all turns out. First, the economic base for this (perhaps, and technical) education is not enough. Need to be a mathematician, preferably higher than average (surely understand the synergy, the theory of pattern recognition, neural nets, etc.). Second, the successful functioning analyst will never tell you about his methods: he earns them money, but because they are unknown to the general public. Widely published in the main losers (again compromising the technical analysis). Autocorrelation in the price series, there is usually no. But if we use the analogy of a drunkard, he, in spite of all their reels, at least in 90 cases out of 100 in the morning arrive at the home (that would be a prediction accuracy on the market!). White noise (the embodiment of a random signal), and chaos - is not identical concepts. In the second case there is no autocorrelation, and the process is quite predictable. However, even when the random walk is not lost, there are means to this case. Chances of success are greatly enhanced if you do not take on important task - to predict the quotation (for some reason, everyone is waiting for the analyst to precisely this), and restrict the elaboration of conduct (buy-sell).
Forecasting foreign exchange market is not only on the basis of any or several of the fundamental factors, but also with the help of various tools of technical analysis.Technical analysis is the analysis of market movements over the previous periods. Recently, more and more traders to attach primary importance to the methods of technical analysis.
Basic tools:- The graph bars;- Graph <noughts and crosses>;- Candlesticks;- Oscillators;- Moving average (Moving Average - MA).
The controversy about the usefulness of technical analysis of markets as well dominates the minds and as inexhaustible as the dispute about the primacy of matter. One can understand the painful and uncertain in a society where to find the support it gets from the gloomy corners of memory beliefs, the failure of which, apparently, had long been in need of argument. Where are offensive, when the economic and journalism practice, the banner which should be rational, are beginning to pay attention to exceptional approaches, at least in academic circles considered to be a logical suspect. Of course, one could argue that the public needs to know about everything, including alternative methods. But when in the professional literature has not dried up the flow of publications, with a sincere reverence responding about technical analysis;Investment consultants presented with the investors as it is perhaps the only sound method of market research;Developers of software investment is proud to warn about the implementation of the new version has more years of proven techniques;Almost nowhere says that a reasonable application of technical analysis requires a considerable number of reservations, the most iron patience comes to an end.According to one of the most widely used definitions, technical analysis (TA) - a set of methods to determine the right moment to buy or sell any assets (usually securities or currencies) on the basis of analysis of price trends and trading volumes. The main objective - to identify the signals that would help predict the change "moods" of the market.
Typically, methods of TA based on the previously observed "patterns" of the dynamics of market parameters, as well as the psychological characteristics of the trading community. TA Followers believe that the changes in the market for only 10% are subject to logic, and by 90% due to psychological factors. Therefore, predicting, as in the mass market participants will act, or "mob" who mastered the TA, "the poet" can achieve brilliant investment results.TA is closely related to the construction and study of various charts and graphs, so it is often called the Chartists agents (from the English chart - chart, not to confuse the British proletarians, the followers of the revolutionary movement in the mid-XIX century). With many typical "picture", indicating, according to the Chartists, the imminent occurrence of a particular market situation, they try to play on a short-term price movements, neglecting, as a rule, long-term objectives, If we consider the method of the TA in its pure form, its followers do not care what industry or firm is under investigation action, as long as she gave those same signals.A new strong impetus to the development of the TA was in an era of global computerization. Plotting and complex calculations of indicators, indexes, and oscillators, which previously had to be done literally in the display. No wonder Arsenal (and aplomb) Chartists it has grown significantly in recent years, a new generation of technology added to them a lot of charm and a kind of mysticism.
Oddly enough, but even the most sophisticated methods of technical analysis is usually not in any way be justified, except truisms like "history repeats itself". By opening a phenomenon Chartists met him outside, not at all trying to find him an explanation. Moreover, among some representatives of this theory are of the opinion that the mechanism of action of the theory are of the opinion that the market mechanism of action is incomprehensible, in other words, we'll never know "why" we can only hope to understand the "how."
Nevertheless, we can not completely deny the technical analysis in the presence of certain basement (mainly this concerns the stability of trends). Firstly, it is quite natural idea to play on the prejudices and the herd instinct "of the crowd." If, for example, we know that non-professional investors in this situation, do so-and-so is possible in principle to predict the direction of the market, for example, any shares may stimulate its acquisition, which leads to further strengthen the trend. Economists call this effect self-fulfilling prophecy, ie, self-fulfilling expectations. Second, information is always distributed evenly and is first in some market players (insiders) and then the other. Often it is the process of diffusion of new information causes a further development of the emerging trends. Finally, if we talk about changing the direction of market movement, the Chartists argue that people tend to remember the price they paid (or would be willing to pay) per share. With this argument (and only!) Became the generally accepted notion of justified "resistance level" (support) and many classical forms of technical diagrams: implementation of the previous price high (or low) forces the investor to sell (buy), which should lead to a reversal. But against these (rather naive, by the way) a lot of explanations can be advanced no less compelling reasons. First, a purely psychological factor as the professionalization of markets means less and less. Second, the trend may change and often actually changing much faster than the analyst is able to read at least some signal. Third, even assuming that the effective methods of technical analysis, the more people enjoy it at the same time, the lower their chances to capitalize. Fourth, with the spread of such practices among traders have an incentive not to wait for the appearance of direct technical signal, and try to act in advance. This can not distort the relevant principle of technical analysis, signal integrity violation (of course, again, if you believe in its existence). Finally, if someone is confident that tomorrow the price should rise by 20%, the liquid market, where prices reflect information almost instantly, it will inevitably happen today. Realizing the weakness of their position, the moderate Chartists go back down and called technical refinements complement the elements of fundamental analysis (ie, studies of "internal" value of the asset). True, it is not clear how increasing the value of such a symbiosis through proper TA.
It's time to move on to implicitly postulated basic principle of Chartism, to which all of the above simply pales: the market has a memory, or, if you will, the inertia, ie knowledge of price dynamics in the past can help predict the future. In particular, it is believed that if the price rose yesterday, today it is more likely to rise than fall (it is the ideology of the so-called signal strength of the market). The position is exactly the opposite of economic theory: the prices are subject to the so-called random walk (random walk). Simplifying, we can model the price process as follows: at each time throws a coin and, depending on the result of throwing the price can move up or down with equal probability. Thus, each next step is totally unpredictable in terms of what happened earlier.Initially, as a popular illustration of the random walk route drinkers cited in the open field. This route is irrational and unpredictable.
By the way, if by means of experiments to construct a random price series, then they can make any favorite Chartists form. Of course, from this point of view, technical analysis is completely absurd. Note that unlike the other uncertainties present dispute is easily resolved with a simple statistical test, calculating the autocorrelation of prices with different time lags. If these autocorrelations for some time periods will be significantly different from zero, there will be only sprinkle ashes on his head and recognize the absolute truth of the Chartists. But alas, they, for the vast majority of markets it is not. (In fairness, we note that the random walk hypothesis is also often can not find direct evidence, but not denied. The question of a more complex non-linear dependence is still open).By the way, if the computers are armed to the teeth, the Chartists, they also become an invaluable tool for exposing the TA. Posteriori estimates have helped to expose dozens of so-called methods, which are showing remarkable results in some periods of time, completely denied to others.
Besides the logical and empirical arguments against the TA, there is the "life". Many can convince the following fact: although in principle at the expense of successful operations in the financial markets work and professional beliefs, among them very hard to find Chartist. It would seem, people familiar with the recipes win, must first enjoy them yourself, but do not share their invaluable knowledge with others: in short, if you are so smart, why are so poor?The sleep of reason produces costsThere certainly astute reader asks: "If the situation is really all so hopeless for the TA, what then caused his undying popularity?"First of all, no one argues that technical analysis is absolutely sterile and will never make a profit. No, in fact so often the case, but, unfortunately, no more than using a simple investment strategies (especially if you consider taxes and fees). This conclusion is also repeatedly confirmed empirically.
Secondly there are reasons to psychological effects.
1. TA is simple, is extremely varied (if not raznoshersten) and maximum algorithmized. This provides ease of application, persistence approach in general in the refusal of its individual components and removes the analyst responsible for any errors.
2. TA - is the straw, which is enough for investors, desperate to understand the mechanisms of functioning of financial markets. This factor is especially significant if you are unavailable adequate basic information and / or the inability to treat her.This is sufficient to effect the technical analysis in some sectors of the market is constantly growing. Thus, according to polls Euromoney, in 1979 90% of forecast agencies in investigations of exchange rates were based on fundamental analysis, and ten years later more than a third of respondents used only the TA! According to the Bank of England, 90% of the leading dealers of the foreign exchange market in London in one way or another use of TA.In general, the foreign exchange market is the least among economists 'rational'. One reason is that the major operators in this market are central banks that are in active foreign exchange intervention, often caused by non-economic (ie, irrational from the standpoint of fundamental analysis), considerations. There are other factors impeding the implementation of the price of "efficiency" of the currency market, resulting in the exchange rates at times deviate significantly from the values dictated by fundamental factors.
In such circumstances, the use of techniques to forecast changes in exchange rates is desirable. The more investors believe in the technical signals, consistent with them, the better the work we have already noted the effect of self-expectations. And although in the long run exchange rates and quotes undoubtedly gravitate to the fundamental values, even the most rational investor can not ignore the presence in the market Chartists.In fact, it has two fundamental ways to profit: with the "crowd" to exploit short-term trends, using the methods of technical analysis, or play against the market, hoping to reverse roll back prices. Most chose the first option. But why rational investors that focus on long-term fundamental criteria, do not try to beat the big acting irrationally Chartists, just as the former George Soros 'punish' the BoE? Unfortunately, this requires a lot of money, the ability to bind to relatively long periods of time, and finally, every big game fraught with serious risks. Meanwhile, the majority of leading institutional investors and to the recent scandals (Barings, Daiwa) prohibit its traders to keep an open foreign exchange position more than a day, and more recently by simply vigilant monitoring of their actions. Limited funds, risk aversion and short-term orientation of the fundamental forced investors - that's where the invincibility of the reasons lie more Chartists.The most notorious cynics believe that the TA has survived mainly because it leads investors to work actively on the market. A further operation - it is unnecessary brokerage fees. Abuse also technical analysis is easy if only because all of voluptuousness pounce on naive chart, invented by old Dow hundred years ago. This is not surprising: they (and others like them) with the manic persistence reproduce all books and pamphlets. But it's like to blame medicine for what its medieval methods were powerless to halt the plague and cholera.
To understand the current state of technical analysis, not all turns out. First, the economic base for this (perhaps, and technical) education is not enough. Need to be a mathematician, preferably higher than average (surely understand the synergy, the theory of pattern recognition, neural nets, etc.). Second, the successful functioning analyst will never tell you about his methods: he earns them money, but because they are unknown to the general public. Widely published in the main losers (again compromising the technical analysis). Autocorrelation in the price series, there is usually no. But if we use the analogy of a drunkard, he, in spite of all their reels, at least in 90 cases out of 100 in the morning arrive at the home (that would be a prediction accuracy on the market!). White noise (the embodiment of a random signal), and chaos - is not identical concepts. In the second case there is no autocorrelation, and the process is quite predictable. However, even when the random walk is not lost, there are means to this case. Chances of success are greatly enhanced if you do not take on important task - to predict the quotation (for some reason, everyone is waiting for the analyst to precisely this), and restrict the elaboration of conduct (buy-sell).
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