Technical Analysis

Abstract

Technical analysis can be defined as the study of exchange rates (and other financial prices) based on supply and demand. Technical analysts (also called technicians or chartists) record, normally in chart form, historical exchange rates and try to deduce from the pictured history the probable future trend. The basic idea is that exchange rates as observed in the foreign exchange market are determined by supply and demand, and this is all that is needed to be known. Technical analysis is widely used, particularly when there is little change in the economic fundamentals that affect exchange rates, and particularly for trading over short periods (for example, daily or intra-day trading). The growing popularity of technical analysis is due largely to dissatisfaction with the fundamental models of exchange rate determination that have been shown to have low explanatory and predictive power. The behaviour of exchange rates since the advent of floating in the early 1970s has been characterised by significant deviations from the equilibrium rate implied by fundamental models such as PPP or the monetary model. Because these models produce some sort of an equilibrium exchange rate, any jump in the exchange rate above this value will be interpreted as a bearish sign. Conversely, technical analysis views the jump as a bullish sign as long as there is no sign indicating a trend reversal.

Keywords

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