full book >>>>click here
by Christopher J. Neely
Technical analysis, which dates back a century to the writings of Wall Street Journal editor Charles Dow, is the use of past price behavior to guide trading decisions in asset markets. For example, a trading rule might suggest buying a currency if its price has risen more than 1 percent from its value five days earlier. Such rules are widely used in stock, commodity, and (since the early 1970s) foreign exchange markets. More than 90 percent of surveyed foreign exchange dealers in London report using some form of technical analysis to inform their trading decisions (Taylor and Allen, 1992). In fact, at short horizons—less than a week—technical analysis predominates over fundamental analysis, the use of other economic variables like interest rates, and prices in influencing trading decisions. Investors and economists are interested in technical analysis for different reasons. Investors are concerned with “beating the market,” earning the best return on their money. Economists study technical analysis in foreign exchange markets because its success casts doubt on the efficient markets hypothesis, which holds that publicly available information, like past prices, should not help traders earn unusually high returns. Instead, the success of technical analysis suggests that exchange rates are not always determined by economic fundamentals like prices and interest rates, but rather are driven away from their fundamental values for long periods by traders’ irrational expectations of future exchange rate changes. These swings away from fundamental values may discourage international trade and investment by making the relative price of U.S. and foreign goods and investments very volatile. For example, when BMW decides where to build an automobile factory, it may choose poorly if fluctuating exchange rates make it difficult or impossible to predict costs of production in the United States relative to those in Germany. Despite the widespread use of technical analysis in foreign exchange (and other) markets, economists have traditionally been very skeptical of its value. Technical analysis has been dismissed by some as astrology. In turn, technical traders have frequently misunderstood what economists have to say about asset price behavior. What can the two learn from each other? This article provides an accessible treatment of recent research on technical analysis in the foreign exchange market.
full book >>>>click here
by Christopher J. Neely
Technical analysis, which dates back a century to the writings of Wall Street Journal editor Charles Dow, is the use of past price behavior to guide trading decisions in asset markets. For example, a trading rule might suggest buying a currency if its price has risen more than 1 percent from its value five days earlier. Such rules are widely used in stock, commodity, and (since the early 1970s) foreign exchange markets. More than 90 percent of surveyed foreign exchange dealers in London report using some form of technical analysis to inform their trading decisions (Taylor and Allen, 1992). In fact, at short horizons—less than a week—technical analysis predominates over fundamental analysis, the use of other economic variables like interest rates, and prices in influencing trading decisions. Investors and economists are interested in technical analysis for different reasons. Investors are concerned with “beating the market,” earning the best return on their money. Economists study technical analysis in foreign exchange markets because its success casts doubt on the efficient markets hypothesis, which holds that publicly available information, like past prices, should not help traders earn unusually high returns. Instead, the success of technical analysis suggests that exchange rates are not always determined by economic fundamentals like prices and interest rates, but rather are driven away from their fundamental values for long periods by traders’ irrational expectations of future exchange rate changes. These swings away from fundamental values may discourage international trade and investment by making the relative price of U.S. and foreign goods and investments very volatile. For example, when BMW decides where to build an automobile factory, it may choose poorly if fluctuating exchange rates make it difficult or impossible to predict costs of production in the United States relative to those in Germany. Despite the widespread use of technical analysis in foreign exchange (and other) markets, economists have traditionally been very skeptical of its value. Technical analysis has been dismissed by some as astrology. In turn, technical traders have frequently misunderstood what economists have to say about asset price behavior. What can the two learn from each other? This article provides an accessible treatment of recent research on technical analysis in the foreign exchange market.
full book >>>>click here
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