What is Technical Analysis?

Among the various tools financial analysts utilise for forecasting the markets, there are basically two methods: fundamental and technical analysis. The goal of this article is to familiarise you with the technical approach that the financial community, including economists, considers today a valuable alternative or supplement to the fundamental analysis. This is the case despite the fact that TA (technical analysis), which mainly works with a graphical representation of historical price action (called "the chart"), contradicts the weak form of the market efficiency hypothesis saying that historical facts can not be used to forecast the market development. One reason for this positive attitude towards TA might be that various studies issued by the quantitative researcher's community show that serial dependence refused by advocates of the weak form of market efficiency is one of the most reliable observed patterns in the markets (i.e. forex market). Expressed in a simpler language this means that price movements are not a random walk but unfold in trends. This is exactly one of the three premises that TA consists of. The other two are: History repeats itself and market action discounts everything. The former means that certain price formations like triangles, channels, etc. reoccur throughout time and can be used to foresee the extent of an ensuing price move. The latter premise argues that any available information (public as well as inside information) is reflected in the current price. So instead of analysing the economic environment (i.e. monetary and fiscal policy, balance sheet, etc.) a technical analyst bases his or her research exclusively on historical price data. One obvious advantage of this procedure is that the rather decisive psychological rational of the investor is taken into account and included indirectly into the research which is handled mostly through mathematical or geometrical methods. It is crucial to keep in mind that Technical Analysis is not an exact science. Rather, TA rather deals with probability distributions (by the way, the same thing is true for the economic approach!!!) and as such leaves room for unexpected counterproductive outcomes. This means that a strict and rigorous discipline is a must in the practical use of technical analysis which should actually be true for any other approach as well! The advantage of TA in contrast to the fundamental approach is that the decision of maintaining or abandoning an active scenario depends on rather exact criteria that can improve or deteriorate decisively with every single price change. It is not necessary to wait for the outcome of fundamental figures that are already out-of-date at the time of their release!

The techniques applied in TA are manifold. Diverse mathematical computer supported formulas usually try to measure the strength of an underlying price move and to unveil divergences where new price extremes are not confirmed, pre-indicating a potential trend reversal. Usually the main tool of a technical analyst, however, remains the chart. The Elliott wave theory for example (developed in the first half this century) tries to distinguish between impulsive (trending) waves (wave stands for price move) and corrective (counter trending) waves and this "wave count" gives the technical analyst a hint about the future development of the market. Volume is another aspect that is worth noting. Volume figures can tell you an important and decisive story about the flow of money. Candle charts, a graphical "candle-shaped" representation of a trading session's open, high, low, and closing price, are a Japanese invention dating from the 18th century and provide valuable clue about potential reversal or continuation of trends. They illustrate that TA is not a recent discovery (as often assumed) and that TA is not applied by the western hemisphere exclusively.

All in all the different technical theories can be viewed as puzzle stones, the combination of which should lead us to the ultimate goal of TA, the set-up of the highest probability scenario for a specific market direction. The established scenario will not look the same for every technical analyst. This is due to the fact that a different combination and weighting of technical indicators might be applied and that a subjective interpretation of the technical constellation can decisively influence the outcome.

Depending on the context TA can be used in different ways. We want to highlight one approach because of its strenght in portfolio management where benchmarks are used for performance measurements.

As mentioned above, we are well aware of the fact that TA deals with probabilities and there are times when the probability distribution is especially favourable and shows a specific scenario. These are the situations when a deviation from the benchmark should be seriously considered as one has the best technical starting point for potential outperformance. The corresponding risk is minimised through the application of a near but technically justifiable protective stop-loss.

By starting to promote technical analysis, even well known Universities now send the financial world the signal that TA, as an original approach to the market forecasting dilemma, has become an important and respected tool in professional portfolio management. Last but not least let's mention the following statements from central bankers that might convince any remaining sceptics:

"Technical analysis, the prediction of price movements based on past price movements, has been shown to generate statistically significant profits despite its incompatibility with most economists' notions of efficient markets..." Federal Reserve Bank of New York, C.L. Osler and P.H. Kevin Chang, Staff Report No. 4, August 1995.

Happy New Year

Goodbye 2007 and Welcome Year 2008,

My resolution in FX:

1. Reduce Mistake in trading and keep on discipline with trading analysis.

2. Analysis and set the Trade only in the morning and evening while at night, will rest and sit down with my family. This is because i have some superstitious that profit is given during that period of time and at night, it is meant for u to take a rest.. :)

3. Of course, make more income from FX market

Good Luck everybody and wish u all a very Happy New Year!

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E-book Kuasa Forex

(Only for those who understand Bahasa)

Kepada sesiapa yang mencari-cari ebook yang dapat membantu anda untuk memahami mengenai Forex ini, boleh memberli E-Book Terbaru di pasaran iaitu E-book Kuasa Forex.

Pembeli e-book ini akan mendapat indicator percuma yang terbukti berkesan untuk membantu anda membuat analisa Forex.

Harga bagi e-book ini ialah RM97 ketika ini. Harga promosi pada RM79 sudah tamat dan harga ini mungkin akan naik lagi sekiranya permintaan meningkat.

Bagi mereka yang berminat, boleh beli di sini

Forex History - The Evolution OF FX Markets

The Gold Exchange and the Bretton Woods Agreement

In 1967, a Chicago bank refused a college professor by the name of Milton Friedman a loan in pound sterling because he had intended to use the funds to short the British currency. Friedman, who had perceived sterling to be priced too high against the dollar, wanted to sell the currency, then later buy it back to repay the bank after the currency declined, thus pocketing a quick profit. The bank’s refusal to grant the loan was due to the Bretton Woods Agreement, established twenty years earlier, which fixed national currencies against the dollar, and set the dollar at a rate of $35 per ounce of gold.

The Bretton Woods Agreement, set up in 1944, aimed at installing international monetary stability by preventing money from fleeing across nations, and restricting speculation in the world currencies. Prior to the Agreement, the gold exchange standard--prevailing between 1876 and World War I--dominated the international economic system. Under the gold exchange, currencies gained a new phase of stability as they were backed by the price of gold. It abolished the age-old practice used by kings and rulers of arbitrarily debasing money and triggering inflation.

But the gold exchange standard didn’t lack faults. As an economy strengthened, it would import heavily from abroad until it ran down its gold reserves required to back its money; consequently, the money supply would shrink, interest rates rose and economic activity slowed to the extent of recession. Ultimately, prices of goods had hit bottom, appearing attractive to other nations, who would rush into buying sprees that injected the economy with gold until it increased its money supply, and drive down interest rates and recreate wealth into the economy. Such boom-bust patterns prevailed throughout the gold standard until the outbreak of World War I interrupted trade flows and the free movement of gold.

After the Wars, the Bretton Woods Agreement was founded, where participating countries agreed to try and maintain the value of their currency with a narrow margin against the dollar and a corresponding rate of gold as needed. Countries were prohibited from devaluing their currencies to their trade advantage and were only allowed to do so for devaluations of less than 10%. Into the 1950s, the ever-expanding volume of international trade led to massive movements of capital generated by post-war construction. That destabilized foreign exchange rates as setup in Bretton Woods.

The Agreement was finally abandoned in 1971, and the US dollar would no longer be convertible into gold. By 1973, currencies of major industrialized nations floated more freely, as they were controlled mainly by the forces of supply and demand. Prices were floated daily, with volumes, speed and price volatility all increasing throughout the 1970s, giving rise to new financial instruments, market deregulation and trade liberalization.

In the 1980s, cross-border capital movements accelerated with the advent of computers and technology, extending market continuum through Asian, European and American time zones. Transactions in foreign exchange rocketed from about $70 billion a day in the 1980s, to more than $1.5 trillion a day two decades later.

The Explosion of the Euromarket

A major catalyst to the acceleration of Forex trading was the rapid development of the eurodollar market; where US dollars are deposited in banks outside the US. Similarly, Euromarkets are those where assets are deposited outside the currency of origin. The Eurodollar market first came into being in the 1950s when Russia’s oil revenue-- all in dollars -- was deposited outside the US in fear of being frozen by US regulators. That gave rise to a vast offshore pool of dollars outside the control of US authorities. The US government imposed laws to restrict dollar lending to foreigners. Euromarkets were particularly attractive because they had far less regulations and offered higher yields. From the late 1980s onwards, US companies began to borrow offshore, finding Euromarkets a beneficial center for holding excess liquidity, providing short-term loans and financing imports and exports.

London was, and remains the principal offshore market. In the 1980s, it became the key center in the Eurodollar market when British banks began lending dollars as an alternative to pounds in order to maintain their leading position in global finance. London’s convenient geographical location (operating during Asian and American markets) is also instrumental in preserving its dominance in the Euromarket.

What Is Forex

Foreign Exchange (FOREX) is the arena where a nation's currency is exchanged for that of another. The foreign exchange market is the largest financial market in the world, with the equivalent of over $1.9 trillion changing hands daily; more than three times the aggregate amount of the US Equity and Treasury markets combined. Unlike other financial markets, the Forex market has no physical location and no central exchange. It operates through a global network of banks, corporations and individuals trading one currency for another. The lack of a physical exchange enables the Forex market to operate on a 24-hour basis, spanning from one zone to another in all the major financial centers.

Traditionally, retail investors' only means of gaining access to the foreign exchange market was through banks that transacted large amounts of currencies for commercial and investment purposes. Trading volume has increased rapidly over time, especially after exchange rates were allowed to float freely in 1971. Today, importers and exporters, international portfolio managers, multinational corporations, speculators, day traders, long-term holders and hedge funds all use the FOREX market to pay for goods and services, transact in financial assets or to reduce the risk of currency movements by hedging their exposure in other markets. MG Financial Group’s combination of low margin and high leverage has changed the way the Interbank currency market operates. We have done this by opening the doors of Forex to retail investors, giving them the professional tools and services needed to trade effectively in an independent atmosphere.

Ive short GBP/USD post at 1.9737. My take profit is at 1.9705 that is about 30 pips. my stop lost is at 1.9765.

Happy trading!