Innovative Journal of Business and Management 5:5, November –December (2016) 116 – 120. Contents lists available at www.innovativejournal.in

INNOVATIVE JOURNAL OF BUSINESS AND MANAGEMENT

Journal homepage:http://www.innovativejournal.in/ijbm/index.php/ijbm

A STUDY OF THE EURO AND U.S DOLLAR IN THE FOREIGN EXCHANGE MARKET

USING TOOLS

M.Ganga Bhavani 1, Anatharaman Pichai2 School of Business, Manipal University, Academic City, Dubai.

ARTICLE INFO ABSTRACT Corresponding Author: This primary goal of this article is to examine the price movements of M.Ganga Bhavani EURO and USD currencies to understand the growth of FOREX market. Assistant Professor, School of These two currencies were selected for the study with an assumption of Business, Manipal University, each being an effective representative of the FOREX industry in the entire Academic City, Dubai. world. This study also discusses about one of the tool i.e. technical [email protected], analysis which helps in analyzing the foreign market before taking investment decisions by the investors. Technical Analysis is a study of the Keywords: Technical Analysis, foreign exchange price market considering factors related to the supply Foreign Exchange Market, and demand. This is very useful method of evaluating securities by Investment Decisions, Evaluation of analyzing the statistics generated by market activity, such as past prices Securities, Stock Prices and . This study used four indicators in technical analysis and the results of these indicators show that almost similar patterns in the stock DOI:http://dx.doi.org/10.15520/ijbm prices and also provide almost similar signals to the trader/investor. The .vol5.iss6.58.pp116-120 reason for choosing these indicators is because most of the traders use these as a base when it comes to the foreign exchange market. To conclude this study provides a good exposure in technical analysis of the Foreign exchange markets around the world giving an example of one of the most majorly traded currency pairs which is the EURO and US DOLLAR. ©2016, IJBM, All Right Reserved INTRODUCTION Foreign Exchange Market (FOREX) is a market market. Due to the high amounts of risk within the market, dedicated to the trade of currency around the world. There traders can develop strategies to help manage the risks by are many examples of trading in the FOREX Market. It is reducing losses during trading. The way the FOREX market important to understand the unique characteristics of the works is by trading a currency against another in a pair. FOREX market before trading. This market is very different The most common pairs include: EUR/USD, USD/JPY, in comparison to trading in the more well-known New GBP/USD, AUD/USD, USD/CHF and USD/CAD. Since the York Stock Exchange. For example, the Foreign Exchange ratio of these currency pairs is constantly fluctuating, a Market has a very high volume that leads to high liquidity. trader can either buy or sell different volumes of a given One advantage of another trading in the FOREX market is currency pair in order to turn a profit as the values of the the leverage. This means that an individual trader can buy pairs change. up to 100:1. To put more simply, an individual can manage The exchange rates fluctuate based on the spread. If you an account with $100,000 with a margin of 1%, so they were trying to purchase a different type of currency from would only need $1,000 in an account. Due to these the bank there are two prices they will quote you; the price specific differences, a trader can enter the market and exit that they will buy your currency and the price that they after a short period of time with decent profits. These will sell you the new 5 currencies at. These prices will differences make it easy to gain profit very quickly in this always be in slight favor of the bank. Currency traders can type of market; however, it is just as easy to lose money, make profits of these exchanges by buying lower and which is why it is very risky to trade within the FOREX selling higher, or selling higher and buying lower. Thus,

Author(s) agree that this article remain permanently open acc116ess under the terms of the Creative Commons Attribution License 4.0 International License Page 116 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools traders will either enter in a buying or a selling position Analysis accept that the business sector is productive and based on which way they anticipate the value to change. the cost has effectively thought about alternate One of the underlying tenets of technical analysis is that components identified with the organization and the historical price action predicts future price action. Since business. The study on specialized investigation of chose the forex is a 24-hour market, there tends to be a large organizations in view of Stratified inspecting system is amount of data that can be used to gauge future price critical as it aides in comprehension the natural estimation activity, thereby increasing the statistical significance of of shares and to know whether the shares are the forecast. This makes it the perfect market for traders underestimated or exaggerated or accurately evaluated. that use technical tools, such as trends, charts and Indicators are used as a measure to gain further insight indicators. It is important to note that, in general, the into to the supply and demand of securities within interpretation of technical analysis remains the same technical analysis. Those indicators (such as volume) regardless of the asset being monitored. There are literally confirm price movement, and the probability that the hundreds of books dedicated to this field of study, but in move will continue. The Indicators can also be used as a this tutorial we will only touch on the basics of why basis for trading, as they can form buy-and-sell signals. technical analysis is such a popular tool in the forex Technical analysts argue that their methods take market. advantage of market psychology as illustrated by the This study is about technical analysis of selected currency quotation from Gupta, L.G (2003) above. In particular, pairs which helps to understand the price behavior, the technical textbooks such as Murphy (1986) and Heung and signals given by them and the major turning points of the Wong. (2000) outline three principles that guide the market price. In this article the price movement of the two behaviour of technical analysts the first is that market of the major currencies in the world, EURO and USD, for a action (prices and transactions volume) “discounts” period of two years have been studied using various tools everything. In other words, an asset’s price history of technical analysis like Simple , Relative incorporates all relevant information, so there is no need Strength Index, Rate of Change, Trend Analysis etc. For the to forecast or research asset “fundamentals.” Indeed, purpose of this study historical prices of selected foreign technical purists don’t even look at fundamentals, except exchange prices were collected from the FOREX market. through the prism of prices, which reflect fundamentals With the help of this project, the comparison between the before those variables are fully observable. Presaging two pairs are known. recent findings by Fama (1965), Engel and West (2005), Objectives Ravindra and Wang, (2006), Murphy (1986) claims that 1. To examine and conduct the price movements of EURO asset price changes often precede observed changes in and USD which helps to understand the progressive fundamentals. The second principle is that asset prices growth of FOREX market globally. move in trends. This is essential to the success of technical 2. To discuss the techniques of analyzing and investing in analysis because trends imply predictability and enable the foreign market to know the efficiency of a security traders to profit by buying (selling) assets when the price before taking investment decisions by the investors. is rising (falling). This is captured in the technicians’ Literature Review mantra “the trend is your friend.” The third principle of Technical Analysis is an investigation of the outside trade technical analysis is that history repeats itself. Asset value market considering variables identified with the free traders will tend to react in a similar way when confronted market activity. Specialized investigation is a technique for by similar conditions. This implies that asset price patterns assessing securities by dissecting the insights produced by will tend to repeat themselves. business sector movement, for example, past costs and Studies on Technical Analysis volume. Technical analysis don't endeavor to quantify a According to Brown, D., Jennings, R. (1989) there are many securities inborn quality, however rather utilize outlines types of technical analysis and many ways to map current and different instruments to distinguish designs that can and past price and volume data into trading decisions. recommend future action. As indicated by Chitra (2011) in Broadly speaking, technicians have traditionally employed actuality the choice made on the premise of Technical two types of analysis to distinguish trends from shorter- examination is done simply in the wake of deducing a run fluctuations and to identify reversals: charting and pattern and judging the future development of the outside mechanical (or indicator) methods. Charting, the older of trade cost on the premise of the pattern. Technical the two methods, involves graphing the history of prices

117 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools over some period— determined by the practitioner—to LeBaron (1992) and Sullivan, Timmermann and White predict future patterns from past patterns. Charting is a (1999) has provided contrary evidence. And many studies very subjective system that requires the analyst to use of the foreign exchange market have found evidence that judgment and skill in finding and interpreting patterns. TTRs can generate persistent profits (Blume, L., Easley, D., Charting is a complex subject and a full disclosure is well O’Hara, M. (1994), Cheung, Chinn, and Marsh. (2000), past the extent of this part. Notwithstanding outlining and Sweeney (1986), Levich and Thomas (1993), Neely, Weller mechanical strategies, specialized examiners likewise and Dittmar (1997), Gençay (1999), Lee and Mathur utilize numerous different sorts of pointers. Some such (1996)). markers dole out an extraordinary part to round numbers An important area of research on technical analysis has in backing or resistance levels. For instance, professionals focused on documenting how and to what extent it is translate an intersection of a critical level, for example, a actually used in foreign exchange markets. This research is yen/dollar rate of 100, as demonstrating further primarily conducted through surveys of technicians. development in the same course. For instance, Creswell Taylor and Allen (1990) and Taylor and Allen (1992) (1995) reported that Jorge Rodriguez, executive of North conduct the first such surveys on chief foreign exchange American Sales at Credit Suisse, expressed, "The 100 yen dealers in London. The responses established that almost level for the dollar is still a major mental boundary and it all traders in the London foreign exchange market use will take a couple tests before it breaks. Be that as it may, technical analysis to some degree and that they tend to once you break 100 yen, it's not going to stay there for combine it with fundamental analysis. So there is not an long. You'll most likely observe it exchange somewhere exclusive reliance on either approach to trading. In around 102 and 106 for some time." Osler (2003) addition, the authors find that the relative weight attached demonstrates that when a conversion scale approaches a to technical analysis is greater at shorter horizons. Thus, round number, for example, 100 yen to the dollar, it tends Taylor and Allen (1992) find that 90% of the respondents to switch its way. In any case, when a swapping scale to their survey report using some form of technical crosses such a level, it tends to move quickly past it. Osler analysis to inform their trading decisions. In addition, they (2005) joins limit requests to the high extent of substantial find that at short horizons—less than a week—traders use changes in return rates. Murphy (1986) talks about technical analysis much more frequently than they do various more elusive strategies, including Elliot wave fundamental analysis, which uses economic variables such hypothesis, Fibonacci numbers and numerous other as interest rates and output growth rates to guide trading specialized ideas. Likewise, brokers some of the time use decisions. specialized investigation of one business sector's value Later surveys confirmed many of these early findings. history to take positions in another business sector, a Cheung and Chinn (2001) find that 30% of U.S. foreign practice called intermarket specialized examination. exchange traders could best be characterized as technical The widespread use of technical analysis in foreign analysts and that an increasing percentage use technical exchange (and other) markets is puzzling because it analysis. Cheung, Chinn and Marsh (2004) confirm implies that either traders are irrationally making previous findings that traders pay more attention to no decisions on useless information or that past prices fundamental factors at short horizons. More recent contain useful information for trading. The latter surveys have investigated the educational background, possibility would contradict the “efficient markets experience and psychological biases of foreign exchange hypothesis,” which holds that no trading strategy should traders, including technical traders. Menkhoff and Schmidt be able to generate unusual profits on publicly available (1997) refutes the notion that technical traders lack the information—such as past prices—except by bearing experience or education of their peers who trade on unusual risk. And the observed level of risk-adjusted fundamentals. The surveyed German technicians do not profitability measures market (in) efficiency. Therefore differ from non-technicians regarding age, education, much research effort has been directed toward position, seniority, their firms’ trading turnover or assets determining whether technical analysis is indeed under management. profitable or not. One of the earliest studies, by Fama and Many studies of the foreign exchange market have Blume (1966), found no evidence that a particular class of indicated profit opportunities. Eugene Fama 1965 and TTRs could earn abnormal profits in the stock market. Sweeney (1977) show that filter rules were profitable over However, more recent research by Brock, Lakonishok and relatively short samples. Cheol and Irwin (2004). likewise

118 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools present evidence of success for both filter and MA rules. toward objective reproduction of a subjective procedure. Perhaps not surprisingly, academic economists were very Savin, Weller and Zvingelis (2007) extend the analysis of skeptical of these challenges to Fama’s (1970) intuitively Lo, LeBaron (1999) by calibrating the pattern recognition appealing efficient markets hypothesis. In a private algorithm using price patterns identified by a practicing communication, Jeffrey Shafer informed us that academics technical analyst and find evidence that the head-and- generally dismissed the findings of Gupta (2003) shoulders pattern has significant predictive power for Fernando, SimóN and Andrada-Félix (1999). The dominant foreign exchange price returns for periods up to 3 months. view in the early 1980s was that evidence of technical The kernel mean regression methodology has yet to be trading profits must be incorrect or specific to one sample. applied to the foreign exchange market. Sweeney (1986) confirms the effectiveness of filter rules Although the majority of academic studies of technical on many dollar exchange rates. By the time Sweeney analysis have used daily data, some studies have used (1986) was published, the tide of opinion in the profession higher-frequency data (Curcio, Riccardo, Charles Goodhart, had probably turned and economists had become aware of Dominique Guillaume, and Richard Payne (1997), Osler the profitability of filter and MA rules in foreign exchange. (2003), Neely and Weller (2003) and Kozhan and Salmon Sweeney (1988) and Levich and Thomas (1993) extend (2010)). Neely and Weller (2003) use half-hourly data this understanding. Levich and Thomas (1993) examine from 1996 to examine trading rules generated by a genetic the sample period from January 1976 to December1990 program and by a linear forecasting model. Once and find average excess returns of 8.1% per annum across reasonable transaction costs are taken into account and six filters for the JPY and numbers of similar magnitude for trade is restricted to times of normal market activity, they the DEM, British pound (GBP) and Swiss franc (CHF). find no evidence of positive excess returns. Kozhan and Average profitability for three MA rules, MA (1, 5), MA (5, Salmon (2010) use tick-by-tick data for the pound sterling 20) and MA (1, 200), is somewhat higher. A bootstrapping against the U.S. dollar drawn from the Reuters D3000 exercise implies that the observed level of profit was very trading system for separate periods in 2003 and 2008. unlikely to be a chance occurrence. In a subsample They find that a trading rule based on a genetic algorithm analysis, they find some indication that profits had can earn significant profits net of transaction costs in 2003 declined in the period 1986 to 1990. Later research but that these profits disappear by 2008. Of course, one investigates the time variation in rule profitability more would like to directly examine the returns to commercial thoroughly. trading recommendations made in real time. Gençay, Researchers have not only investigated the reasons for the Ramazan, Guiseppe Ballocchi, Michel Dacorogna, Richard apparent profitability of mechanical TTRs that use daily Olsen, and Olivier Pictet, 2003a (2003) use high frequency data, they have also sought to more closely approximate data to compare a widely used commercial real-time the actual practice of technical analysis, which often trading model with technical traders and an exponentially exploits pattern analysis, high-frequency transactions and weighted moving average model, respectively. The a variety of currencies. Although it is much more commercial real-time model dominates its competitors in straightforward to analyse simple mechanical trading risk-adjusted return. rules, researchers have made some progress in looking at Other studies have extended the literature on technical more complex, pattern-based rules. In particular, Osler and analysis by studying the application of such rules to other- Chang (1995) construct an algorithm to identify “head- than-major-dollar exchange rates. Lee and Mathur (1996) and-shoulders” patterns in currency markets. They find find that MA trading rules have marginal profitability for evidence to suggest that these patterns have predictive only two of six cross rates (non-USD rates). Neely and ability in some markets. Jensen, and Benington (1970) do Weller (1999) show remarkable success for rules created further work along these lines and look at the predictive by genetic programming in the target zones of the ability of several commonly used price patterns, including European Monetary System. Lee and Mathur (2001) head-and-shoulders, in the context of equity markets. discern mixed results for MA and channel rules for 13 Their distinctive contribution is that they initially smooth Latin American exchange rates. Schwager, J. (1995) the price series using kernel mean regression, which discovers that trading rules produce significant profits— provides a plausible analogue to the signal extraction task but not after risk adjustment—for developing countries. performed by the human brain, which filters out noise and Neftçi, S. N. (1991) find that both technical analysis and identifies the occurrence of a price pattern. It is a step information from macroeconomic variables can create

119 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools profitable trading strategies for emerging market ▪ A hybrid happens when the %K line (the quick exchange rates from 1997 to 2007. Likewise, stochastic) meets the %D line (the moderate stochastic). Pukthuanthong-Le, Kuntara, Levich, and Thomas III, 2007, ▪ Because the %K line responds all the more rapidly find that emerging market currencies appear to provide to market transforms, it sways at a quicker rate then the some profit opportunities to technical rules. In summary, %D line. Under specific conditions, it can get up to speed the evidence for technical trading profitability in cross- to, and traverse, the %D line. rates is mixed but emerging markets show greater profits ▪ When the %K Stochastic traverses and moves than recent dollar markets. over the %D Stochastic, the translation is that the business Research Method sector rate is picking up at a speedier rate than the normal Scope spoke to by the %D Stochastic. This expansion in value This study is restricted only to two currencies i.e. EURO quality is viewed as a purchase signal. and US $ from FOREX market. The collection of data is ▪ A offer sign is the consequence of the %K limited to two years i.e. 2014 to 2016. Only the four Stochastic intersection under the %D Stochastic. This is on indicators of technical analysis namely Stochastic account of the speedier moving %K line is declining at a Oscillator, index (RSI), , quicker rate than the generally, descending pattern. Parabolic SAR are taken into account, but other analysis b) Divergence like fundamental analysis, emotional factors are not taken ▪ Divergence is just the distinction – or the hole – into consideration for this study. between the %K and %D Stochastic lines. Data Collection ▪ Because the %K line moves quicker than the %D The data used is secondary in nature. For technical line, the disparity (the crevice) between the two stochastic analysis the monthly price movements of selected increments as a pattern assembles energy. Be that as it currencies from FOREX were absorbed for 2 years i.e.1- may, the lines come nearer together as energy melts away January-2014 to 1-January-2016. The closing prices on the in the prelude to a rate inversion. last working day of the week were analyzed using various c) Overbought and Oversold designations tools. The details about the specific currencies were ▪ Once the %K line climbs into the 80 and above collected from the official website. Industry Information is region of the stochastic scale, analysts consider this to be collected from published research works and other an overbought condition. This could lead to a sell-off financial websites, publication books, reports prepared by forcing the price downwards. research scholars etc. The data required and collected have ▪ When the %K line falls below 20 on the Stochastic been analyzed by using Meta- Trader 4 platform. scale, the market may now consider the currency pair to be Tools used for the purpose of analysis in this study oversold. As a result, traders may start buying thereby are: lifting the price higher as the market scoops up a 1. "bargain". 2. (RSI) 3. Bollinger bands Formula:| %K = (Current Close - Lowest Low)/ (Highest 4. Parabolic SAR High - Lowest Low) * 100 1. Stochastic Oscillator %D = 3-day SMA of %K Utilizing a scale to quantify the level of progress between Lowest Low = lowest low for the look-back period costs starting with one shutting period then onto the next, Highest High = highest high for the look-back period the Stochastic Oscillator endeavors to anticipate the %K is multiplied by 100 to move the decimal point two likelihood for the continuation of the present bearing places pattern. Merchants search for signs created by the The default setting for the Stochastic Oscillator is 14 activities of the stochastic lines as saw on the stochastic periods, which can be days, weeks, months or an intraday scale. timeframe. A 14-period %K would use the most recent The Stochastic Oscillator produces three sorts of signs: close, the highest high over the last 14 periods and the a) Crossovers lowest low over the last 14 periods. %D is a 3-day simple b) Divergence (quality of pattern) moving average of %K. This line is plotted alongside %K to c) Overbought/Oversold assignments act as a signal or trigger line. a) Crossovers Significance

120 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools

The stochastic oscillator signals waning even moving average (SMA). This second line smooths the data as price continues to rise. If the stochastic oscillator prints and allows analysts and traders to pinpoint shifts in a lower high than has previously been attained despite momentum by looking at crossover points. When price reaching a new higher high, a contradiction called predicting potential reversals, investors look for moments divergence, it is a strong indicator that bullish conviction is when the oscillator crosses through its SMA, indicating wavering and the trend may be exhausting itself. This that its reading for the current session differs markedly interpretation is based on the widely accepted theory that from its recent performance. This signal is especially price follows momentum. strong when it occurs while the security has reached Another advantage of the stochastic oscillator is that it overbought or oversold levels, as reversals are more likely includes a second line that reflects its three-day simple at these times.

Price line %D %K

Stochastic oscillator using K% as 3 and D% as 5 2. Relative Strength Index A trader might buy when the RSI crosses above the The Relative Strength Index (RSI) is one of the more oversold line (30). popular technical analysis tools; it is an oscillator that RSI Potential Sell Signal: measures current price strength in relation to previous A trader might sell when the RSI crosses below the prices. The RSI can be a versatile tool, it might be used to: overbought line (70). • Generate potential buy and sell signals Varying the time period of the Relative Strength Index • Show overbought and oversold conditions might increase or decrease the number of buy and sell • Confirm price movement signals. In the chart below of Gold, two RSI time periods • Warn of potential price reversals through are shown, 14-day (default) and 5-day. Notice how in this divergences example, decreasing the time period made the RSI more RSI Potential Buy Signal: volatile, increasing the number of buy and sell signals substantially.

121 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools

An alternative way that the Relative Strength Index (RSI) occur or if the market should, at the very least, turn may give buy and sell signals is given below: oblique and witness a few modifications. The overbought • A trader might buy when price and the Relative signal indicates a high possibility of insufficient buyers to Strength Index are both rising and the RSI crosses above push the asset up slightly. This results in a freeze in price the 50 Line. movement. The oversold level, on the other hand, shows • Similarly, a trader might sell when the price and that there are not enough sellers in the market to push the RSI are both falling and the RSI crosses below the 50 prices lower. This implies that when the RSI reaches Line. overbought levels and above, it is most likely that price Significance movement will slow down and, possibly, overturn A major advantage of using the relative strength index downward (RSI) is that it ultimately indicates the overbought (70) Formula: and oversold levels (30) to traders. RSI signals help RSI = 100 ------professional traders make the right trading decisions and 1 + RS allow them to quickly exit and enter the financial market. RS = Average Gain / Average Loss The signal tells traders to buy when the value crosses To simplify the calculation explanation, RSI has been above the oversold line and sell when the signal crosses broken down into its basic components: RS, Average Gain below the overbought line. The RSI is, thus, a stylish and Average Loss. This RSI calculation is based on 14 indicator that generates buy and sell signals, illustrates periods, which is the default suggested by Wilder in his overbought and oversold conditions, confirms price trend book. Losses are expressed as positive values, not negative and movement, and can show potential price reversals values. through divergence. The very first calculations for average gain and average The RSI offers smooth movements which conveniently fit loss are simple 14 period averages. into an orderly package between 0 and 100. It measures • First Average Gain = Sum of Gains over the past 14 recent price strength in relation to preceding prices. The periods / 14. signals are self-fulfilling and are very powerful tools to • First Average Loss = Sum of Losses over the past 14 indicate bullish or bearish divergence. For example, if the periods / 14. The second, and subsequent, calculations currency is making a new high with the RSI remaining are based on the prior averages and the current gain stable, it indicates that the uptrend won’t last long. This is loss: known as bearish divergence and occurs when the RSI • Average Gain = [(previous Average Gain) x 13 + current signal drops to a level lower than its most recent trough. Gain] / 14. Although RSI indicates trend, it is mainly watched at Average Loss = [(previous Average Loss) x 13 + current oversold or overbought levels. Loss] / 14. These levels indicate when a price trend is overdone or Relative strength index using 14 period: sustainable, and they show if a reversal in price is likely to Bollinger Bands

Price line RSI line

117 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools

Bollinger Bands® consist of a center line and two price prove beneficial when a trader decides whether or not to channels (bands) above and below it. The center line is an buy or sell in the direction of the breakout. exponential moving average; the are the Bollinger Band Breakout through Resistance Potential Buy standard deviations of the foreign exchange price being Signal: studied. The bands will expand and contract as the price A trader might buy when price breaks above the upper action of an issue becomes volatile (expansion) or Bollinger Band after a period of price consolidation. Other becomes bound into a tight trading pattern (contraction). confirming indicators might likely be used by the trader, Bollinger Bands is a versatile tool combining moving such looking for resistance to be broken. Bollinger Band averages and standard deviations and is one of the most Breakout through Support Potential Sell Signal: popular technical analysis tools. There are three Similarly, a trader might sell when price breaks below the components to the Bollinger Band indicator: lower Bollinger Band. A trader might use other confirming • Moving Average: By default, a 20-period simple indicators as well, such as a support line being broken. moving average is used. Significance • Upper Band: The upper band is usually 2 standard • Greater level of analytical sophistication using this deviations (calculated from 20-periods of closing data) simple and elegant tool for trending. above the moving average. • Numerous different ways to set up the Bollinger Band® • Lower Band: The lower band is usually 2 standard channels deviations below the moving average. • This technique generally works well in markets that Playing the bands is based on the premise that the vast bounce around in a consistent range, also called range- majority of all closing prices should be between the bound markets. Bollinger Bands. That stated, then a foreign exchange • One of the other great advantages of Bollinger Bands® is price's price going outside the Bollinger Bands, which that they adapt dynamically to price expanding and occurs very rarely, should not last and should "revert back contracting as increases and decreases. to the mean", which generally means the 20-period simple Therefore, the bands naturally widen and narrow in sync moving average. A version of this strategy is discussed in with price action, creating a very accurate trending the book Trade like a Hedge Fund by James Altucher. envelope. Possible Buy Signal: Formula: A trader might buy or buy to cover when the price has • Middle Band = 20-day simple moving average (SMA) fallen below the lower Bollinger Band. • Upper Band = 20-day SMA + (20-day standard Possible Sell Signal: deviation of price x 2) • Lower Band = 20-day SMA - (20-day The potential sell or buy to cover exit is suggested when of price x 2) the foreign exchange price, future, or currency price Bollinger Bands consist of a middle band with two outer pierces outside the upper Bollinger Band. Rather than bands. The middle band is a simple moving average that is buying or selling exactly when the price hits the Bollinger usually set at 20 periods. A simple moving average is used Band, considered to be a more aggressive approach, a because the standard deviation formula also uses a simple trader might wait and see if the price moves above or moving average. The look-back period for the standard below the Bollinger Band and when the price closes back deviation is the same as for the simple moving average. inside the Bollinger Band, then the potential trigger to buy The outer bands are usually set 2 standard deviations or sell short would occur. This might help reduce losses above and below the middle band. when prices breakout of the Bollinger Bands for a while. 4. Parabolic SAR However, it could be argued that many profitable The parabolic SAR is a that is used by opportunities could be lost. Also, some traders might exit many traders to determine the direction of an asset's their long or short entries when price touches the 20-day momentum and the point in time when this momentum moving average. has a higher-than-normal probability of switching Breakouts occur after a period of consolidation, when directions. Sometimes known as the "stop and reversal price closes outside of the Bollinger Bands. Other system", the parabolic SAR was developed by the famous indicators such as lines might technician Welles Wilder, creator of the relative strength

116 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools index, and it is shown as a series of dots placed either advantages of this technical tool are its simplicity, clarity of above or below an asset's price on a chart. signals, ease of interpretation, and tendency to generate The Parabolic Stop and Reverse (SAR) indicator combines concrete points of action during a trending market. These price and time components in an attempt to generate same strengths are also the weaknesses of the indicator. It potential buy and sell signals. The Parabolic SAR is sometimes the case that the solid signals of the SAR advertises itself as an effective tool to determine where to indicator lack any practical basis. To avoid such conditions, place stop loss orders. we suggest that you use the SAR indicator with oscillators Parabolic SAR Potential Buy Signal: A trader might buy that signal emerging divergence/convergence scenarios, when the price closes above the upper Parabolic SAR. so that the common problem of whipsaws are reduced in When the Parabolic SAR changes from being above price to frequency. Ultimately, of course, our best guide should below price, then the trader might "stop" and buy to cover always be money management and prudence in trading, their existing short sell and "reverse" direction and buy to beyond any single technical indicator. go long. Formula: Parabolic SAR Potential Sell Signal: A sell signal is Calculation of SAR is complex with if/then variables that potentially generated when the price closes below the make it difficult to put in a spreadsheet. These examples lower Parabolic SAR. At the time that the Parabolic SAR will provide a general idea of how SAR is calculated. changes from being below price to being above price, the Because the formulas for rising and falling SAR are trader might "stop" and sell to exit their existing long trade different, it is easier to divide the calculation into two and "reverse" direction and sell to go short. parts. The first calculation covers rising SAR and the The Parabolic SAR advertises itself as a good tool in second covers falling SAR. determining where to place stop loss orders. The Parabolic Rising SAR SAR gives suggestions as to where a trader might place Prior SAR: The SAR value for the previous period. stop loss orders to protect profits or minimize losses. Extreme Point (EP): The highest high of the current The Parabolic SAR might be useful to a trader because: uptrend. It acts as a trailing stop. Rather than putting in one stop Acceleration Factor (AF): Starting at .02, AF increases by loss below where a trader entered a long position or above .02 each time the extreme point makes a new high. AF can where the trader entered a short position, using the reach a maximum of .20, no matter how long the uptrend Parabolic SAR as a trader's guide, the stop loss is gradually extends. raised for a long position and lowered in a short position, Current SAR = Prior SAR + Prior AF (Prior EP - Prior SAR) effectively locking in any profits. 13-Apr-10 SAR = 48.28 = 48.13 + .14(49.20 - 48.13) It acts as a time stop. Time stops are used by traders The Acceleration Factor is multiplied by the difference because they enter in buy or sell orders expecting a certain between the Extreme Point and the prior period's SAR. move to occur. If the expected move never occurs and the This is then added to the prior period's SAR. Note however reason the trader initiated the trade is no longer relevant, that SAR can never be above the prior two periods' lows. then the trader would probably exit their trade. Similarly, Should SAR be above one of those lows, use the lower of the Parabolic SAR incorporates time into its calculation the two for SAR. making sure a stock, future, or currency trade is working Falling SAR for the trader, if the trade is not moving in the desired Prior SAR: The SAR value for the previous period. direction, the Parabolic SAR will suggest an exit point. Extreme Point (EP): The lowest low of the current The Parabolic SAR indicator created by Welles Wilder and downtrend. chronicled in his classic New Concepts in Technical Acceleration Factor (AF): Starting at .02, AF increases by Trading Systems attempts to give easy to interpret buy and .02 each time the extreme point makes a new low. AF can sell signals as well as attempts to create an easy to follow reach a maximum of .20, no matter how long the methodology for entering stop loss orders. downtrend extends. Significance Current SAR = Prior SAR - Prior AF (Prior SAR - Prior EP) This indicator is most useful in a trending market. It is best 9-Feb-10 SAR = 43.56 = 43.84 - .16(43.84 - 42.07) to use it in combination with other indicators that The Acceleration Factor is multiplied by the difference establish the general direction of the trend at a higher between the Prior period's SAR and the Extreme Point. level, while trading short-term volatility with the SAR. The This is then subtracted from the prior period's SAR. Note

117 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools however that SAR can never be below the prior two use the higher of the two for SAR. periods' highs. Should SAR be below one of those highs, Parabolic SAR with step at 0.01 and maximum at 0.2

Parabolic SAR

Price line

RESULTS AND DISCUSSION possible downtrend which is an overbought condition and This study was conducted on two of the major players of the trader can analyze a potential sell signal. The %K the FOREX industry i.e. EURO and U.S. DOLLAR. For this Stochastic crossing under the %D Stochastic in November study the historical closing prices and trade volume of 2014. The %K line is has a faster pace and declining down both the currencies were collected from the foreign at a faster rate which also signals a downtrend and can be exchange market, for a period of two years, from 1st taken as a potential sell signal by the trader. The %K line January 2014 to 1st January 2016. The currencies were falls below 20 on the stochastic scale in June 2015. This selected for the study with the assumption of each being a pattern can be taken as a potential uptrend which leads to major currency pair of growth in their respective market. an oversold signal in the chart. This can also signal the The main purpose of conducting this study was to analyze trader to a buy signal. The stochastic oscillator is one of the and identify the progressive growth of FOREX market best know tools used in technical analysis and it has been globally. The gathered data was analyzed using various rated one of the five best tools that can be used in the tools and methods of Technical Analysis, in order to foreign exchange market to predict and analyze market critically examine and understand the working, conditions which will help the trader analyze whether to implications and importance of technical tools in real time. sell or buy. The above analysis was designed using help of graphs and Relative Strength Index (RSI) tables, in a way so that it could help understanding the The price line along with the RSI line is in a downward price movement, foreign exchange price behavior, identify trend from January 2014 and the RSI line falls below the a pattern and major turning points of respective market 50 mark in the mid of July 2014 this is a potential sell and FOREX industry overall. signal. STOCHASTIC OSCILLATOR The RSI line falls below the 20 mark in December 2014 The %K line climbs into the 80 and above region of the this gives an oversold signal to the trader and also can be stochastic scale in August 2014 this can be taken as a taken as a potential buy signal and a possible uptrend can

118 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools be expected. The RSI line rises above the 20 mark in April the FOREX industry in the entire world. Along with this, 2015, this can be considered as a potential buy signal for the report also aims at helping the reader understand the the trader and the trader could expect a possible uptrend techniques of analyzing and investing in the foreign in the price line. Relative Strength Index (RSI) is a exchange market and to analyze efficiency of a security. momentum oscillator that measures the speed and change For the purpose of analysis, various tools of Technical of price movements this helps the trader to identify the Analysis were applied to the closing prices of two foreign speed and change of the price in the market based on exchange prices over a period of two years i.e. 2014-2016. which. The RSI analysis shows a downtrend which can be Historical weekly closing prices were obtained from the identified by the RSI indicator dropping below the 50 mark official websites of the foreign exchange markets. which can be taken as a potential sell signal. Technical Analysis is a method which studies past price Bollinger Bands and volume of stock traded in order to identify patterns The price line does not touch the upper Bollinger band, if and predict future activity. It helps understand the price so it would be a possible sell signal which is received by behaviour of the shares, the signals and major market the trader with a potential downtrend. The price line turning points. In order to become successful traders forms a breakthrough pattern in the bottom Bollinger within the Foreign Exchange Market, market research was band in August 2014. This can be taken into account as a required to see which were used as the best practices for potential buy signal by the trader and also a potential trading. It was needed all aspects of the market, including: uptrend in the market. the jargon associated with trading, key differences There is an M-top that begins in October 2013 and ends in between the FOREX market other markets, the different April 2014, this signals a reversal in the pattern of the currency pairs and commodities that are traded, as well as trend from an uptrend to a downtrend. There is a W- the different types of trading platforms and how they bottom that starts in April 2015 and ends in August 2015 operate. Once we were familiar with the key terms, which can be taken as a potential signal for reversal from a understanding of the market and the trading platform the downtrend to an uptrend by the trader. While every project was ready to be done. strategy has its drawbacks, Bollinger Bands® have become Once the project had begun it was keen to understand both one of the most useful and commonly used tools in the technical and fundamental analysis associated with the spotlighting extreme short-term prices in a security. This Foreign Exchange Market. A technical analysis given the trader an added advantage by not only analyzing encompassed a wide range of technical indicators that the chart in one way like other technical indicators but also were used to track patterns within price data movement. It by using M-tops and W-bottoms which are used to see if was concluded that the use of different indicators can help there will be a trend reversal. traders better visualize trends and patterns within the Parabolic SAR data, making it easier to predict future values. Our The parabolic SAR line closes below the price line in the fundamental analysis encompassed a wide range of month of June 2014 and the parabolic SAR line closes knowledge of political and macroeconomic occurrences. above the price line in the month of August 2015. We can The intuition of the project concluded that understanding see that the SAR line closes below in June 2014, this can be how fundamental factors can impact the market is an taken as a strong sell signal by the trader and in August essential aspect of becoming a successful trader. 2015 the price closes above which can be taken by the Furthermore, it is necessary to include a combination of trader as a strong and potential buy signal. This indicator both a technical analysis as well as fundamental is one of the simplest technical indicators used in FOREX knowledge in order to optimize success. trading and also it is one of the most efficient indicators. After practicing with different indicator set ups it was keen CONCLUSION to research which ones are widely used to include in the With the rapidly changing financial system across the project. This methodology proved to be one of the most globe, FOREX sector will always be an eye opening essential tools that a trader can use. Indicators improves industry for investment. This study was conducted to the outcome of the trades; additionally, that each study and examine the price movements of two of the individual trader within the group tends to prefer a major currencies in the world, namely the Euro and the US slightly different indicator set-up. Furthermore, this $. These two currencies were selected for the study with project concludes that a simple set-up is better than an an assumption of each being an effective representative of over-complicated one. Too many indicators can tend to

117 Ganga et.al/A Study Of The Euro And US Dollar In The Foreign Exchange Market Using Technical Analysis Tools confuse the trader and remove focus from the price data. the next few sections, our subject will remain the various The most common indicator set-up for our trading group aspects of forex analysis. In this study with reference to included the use of moving averages, support and the objectives, the movement of the foreign exchange resistance levels as well as keeping up to date on prices does not depend on one particular area but every fundamental knowledge. It was mandated that the project aspect of a country when it comes to currency. If the requires to read the current issue of The Gartman Letter country introduces a new health care program the prices before entering a position on that specific date. A trading of that particular country’s currency might go up which is methodology is the most effective tool that a trader can also known as fundamental analysis in the foreign use. If followed correctly this can help a trader reduce exchange market. mistakes and minimize emotional bias in his or her trades. The study involving the price data patterns can be One of the underlying tenets of technical analysis is that analyzed using technical analysis and also by referring to historical price action predicts future price action. Since the fundamental part of the foreign exchange. It is the forex is a 24-hour market, there tends to be a large important for a trader to analyze the historical price data amount of data that can be used to gauge future price patterns and every technical indicator uses there historical activity, thereby increasing the statistical significance of price patterns to predict the prices of the future. In the forecast. This makes it the perfect market for traders reference to the four technical indicators used, in which that use technical tools, such as trends, charts and each of the indicators show almost similar patterns in the indicators. It is important to note that, in general, the stock price and also provide almost similar signals to the interpretation of technical analysis remains the same trader. The reason these indicators were chosen is because regardless of the asset being monitored. There are literally most of the traders use these as a base when it comes to hundreds of books dedicated to this field of study, but in the foreign exchange market. To conclude the study has this tutorial we will only touch on the basics of why given researcher a good exposure in technical analysis of technical analysis is such a popular tool in the forex the Foreign exchange markets around the world giving an market. 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