Source:
Topic: Foreign Exchange
Sort Desciption: FOREIGN EXCHANGE RESERVES: HOW MUCH IS ENOUGH?
Content Inside:
FEDERAL RESERVE BANK OFST. LOUIS
23
SEPTEMBER /OCTOBER 1997
Technical
Analysis in
the Foreign
Exchange
Market: A
Laymans Guide
Christopher J. Neely
Technical analysis suggests that a long-term rally
frequently is interrupted by a short-lived decline.
Such a dip, according to this view, reinforces the
original uptrend. Should the dollar fall below
1.5750 marks, dealers said, technical signals would
point to a correction that could pull the dollar back
as far as 1.55 marks before it rebounded.
Gregory L. White
Wall Street Journal
November 12, 1992
T
echnical 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 currencyif
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 surveyedforeign
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 interestrates, and
prices in influencing trading decisions.
Investors and economists are interested
in technical analysis for differentreasons.
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 analysi ...
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