Today I am starting a series of occasional in one of the most fascinating and essential in foreign exchange trading; the interaction between the psychology of the market and the decisions of the individual trader. I hope that these comments are useful; Reader comments are welcome.
Technical analysis is sometimes studied as if it contains a grain of secret knowledge or portrays an intrinsic truth about currency movements. It is often said that a formation of graphics will produce a specific price movement.
Technical analysis does nothing of the sort. A graph is a reflection of the latest prices, nothing more. In itself a graph can not predict future prices. A currency not trade up or down due to a formation in a graph. Moves because the participants of the market make basic assumptions about the future price behavior based on the record of the last price action. A drawn action of price history is the history of accumulated thousands of commercial decisions. It is a record of the behavior from thousands of individual traders.
Pricing information is significant only because the decisions of the merchant power of prediction. A simple test of limited intelligence ahead of the historic price action is the notion well attest that fundamental events must always take precedence over technical analysis. If the Fed raises rates unexpectedly or the Chinese Government announces that it will buy no longer us treasures there is no formation of graphic that has existed ever will avoid that the dollar's shot in the first instance or falling in the second.
Technical analysis does not cause price movement. Stating the obvious because it is easy to lose sight of the current composition of the market - thousands of individual decisions in the endless attribution of trade cause and effect of 'market'. The mechanism of translation for the technical analysis runs of the information contained in a graph, through the evaluation of the information by the participants of the market for the commercial behaviour of the participants in the market.
Another way to address this idea is to ask you, which is only the 'market' and what you are trying to achieve every day. It is likely that more than 90% of the daily volume of 3.2 billion dollars in the FX market is speculative. This means that everyone in the market of the merchant of hedge fund with $ 1 billion in the service, the trader of euro on the desktop of interbank Deutsche Bank to the retailer in its study, attempts to do the sameyou have House daily commercial benefits.
Curiously, the foreign currency in general worldwide trading volume in 2007, the year of the latest survey, increased nearly 50% of the previous survey of daily $ 1.9 trillion in 2004. The segment information counterpart retailers belongs currency boosted its share of turnover to 40% of 33% according to Bank International payments of Basel (BIS, 2007) carried out by the three-year survey.
To return to an earlier point, if each participant of the market is trying to do the same, i.e. estruje trade benefits from the activities of the day, how all proceed?
The first thing every trader makes, in New York, Tokyo, London and in every land between is looking for business opportunities and pull up graphics. Each merchant looking for benefits is to judge the same graphics. Everyone sees the same history of price, and all identified the same formations potentially profitable graphic. And, in the absence of other factors, the majority of traders at the same commercial conclusion based on the graphic formations observed.
If the euro has been up for two weeks in a canal and close to the bottom of the channel most traders looking for an opportunity in euros are bet on the continuation of the trend above and the maintenance of the channel. Just above the floor of the canal are purchase orders. And much of the time that the graphics will be proven correct, that the euro will be made to bounce from the floor of the channel. But it bounces not because, for example, the ECB is expected to raise rates in the future, but for the adjustment between the objectives, information, and the hypothesis of the traders of the market.
Marketers need benefits, all graphs contain the same information and all operators operating with similar assumptions about the behavior of the market based on chart formations. If enough traders place their orders over the part inferior of the channel is likely that the euro bounce on the floor of the channel and continue the training of the channel on the upside, except external events of course.
There are powerful prophecy self-fulfilling logic in technical analysis, it works, because the world trade believed that it works and makes its trading decisions accordingly. A retailer this knowledge is the most accessible and effective commercial strategy that exists.
Joseph Trevisani
Chief market analyst
Important notice: these comments are only informational purposes. Past results are not necessarily indicative of future results. Futures, options on futures and foreign currency trading involves substantial risk of loss and may not be suitable for all investors. They should carefully consider if the trade is right for you in the light of its circumstances, knowledge and financial resources. You may lose all or more than your initial investment. Recommendations, opinions and market data are subject to change at any time. The information contained in this email does not constitute a request to buy or sell by FX Solutions, LLC., or their affiliates and should not be available to individuals in a jurisdiction where such availability would be contrary to law or local regulation.
(Graphic courtesy of FX Solutions FX AccuCharts.) Price in the first panel, stochastic slow in the second panel; upward trend in green lines; downward trend in red lines; support/resistance in yellow horizontal lines; (Simple moving average of 200-period in light blue.)
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