Rogovska-Ishuk Irina
Problems of Used the Technical and Fractal Analysis on FOREX.
Annotation: This article deal with the main problems of using the technical
analysis on FOREX and to the defining the way of removing such problems. The
major emphasis is laid to the techniques of synergetic approach because fractal
analysis is one of the complicated kinds of analysis.
Key words: technical analysis, fundamental analysis, fractal dimension index,
trader, pair of currencies, investment horizon.
I Entry: FOREX is one of the most remarkable markets not for the only
generation in many countries all over the world. It is characterized by many
advantages such as: suitable conditions and wide possibilities. Many financial
organizations, funds, commercial and central banks, and sole proprietorships are
the participants of this market. Each of such groups has its own interests and
advantages on the FOREX, for example protecting the national currency or taking
speculation profit. All participants fulfill their own main functions: writing trade
rules, providing liquidity, regulating exchange rate. FOREX is a huge market
embracing the world.
The problem of using the technical analysis, as a main kind of analysis for
forecasting future exchange rate was described by such authors as J. Murphy [3],
S. Achelis [1], A. Elder, E. Peters [7], B. Williams [2]. Thanks for Ukrainian
authors O. Sochatska, E. Naiman [4, 5, 6], who in their researches has investigated
the technical analysis problem; this kind of forecasting has become popular in our
country. But some problems are not decision for this time.
II Problem: Exchange market traders require decision of such problems as choice
effectively methods of trading, wage of new approaches and others. All these
problems are the task of our article.
III Results: There are no statistic data about participant quantity, which prefer
technical analysis and use it as their main approach. Major criterion of choice of
the kind of analysis is investment horizon of trader. Considering the answer to this
question, we propose to divide traders into groups:
 Intraday investors (a day);
 Shot term investors (a week);
 Middle term investors (a month)
 Long term investors (more then a month).
For intraday investors useful charts are: tic, 5, 10, 30, 60 min. charts
(Figure 1). More long charts include shot charts. Usually chart with longer time
period is characterized by a wide price diapason because, for example, during a
moth courses are jumping stronger then during 5 min. Therefore a rising or lowing
of price on 5 min chart looks like strong signal but on month chart it is invisible.
Thanks to volatility, investors may have profit if he works on long term periods,
but shot term trading is not so profitable. Shot term trading is useful only if
investor is using big lots. Many traders think that intraday trading is risky and
useless. Advantages of intraday operation are possible to follow the market and to
close all position in time.
If investor keeps position during a day and transfers it in to next day he has
many risks because FOREX is working non-stop and profitable position today may
be lost next day. For shot term investors useful charts are: all intraday and day
charts (Figure 1). The day charts is one of the most popular and informative among
traders. It is useful for all investors on the market. Shot term investors usually are
content by not big profit. They open and close position all the time during the
week. If intraday traders haven’t time for any analysis, but shot term investors are
using the technical approach.
Middle term investors use week charts but main form of all is day charts.
Such traders usually keep its position during long time and, as a result, have
seriously risks. This group of market participants is using the technical and
fundamental analysis. I must mention that short term and middle term investors
are the most active market segment.
Long
term
time
period
claims
considerable
capital
recourses,
professionalism, and knowledge. The main idea of long term trading is not
speculative profit, but other strategic targets. Traders use a month chart but it is
non informative (Figure1). Day chart is one of the most useful for long time
investors as well.
Tic
5
10
30
Day
60
Week
Month
Intraday investor
Shot term investor
Middle term investor
Long term investor
Figure 1 Choice the time period
Summing up I can state that trader’s behavior depends on many factors but
investment horizon is the main factor. Figure 2 demonstrates how lot depends on
investment horizon. Smallest lots used the trader, who keeps a position is not so
long. Lots become bigger if horizon becomes wider. Only long term investor may
venture risk of big sum.
Intraday investor
Shot term investor
Middle term
investor
Long term
investor
Position
Smallest lot
Figure 2 Depending lots by investment horizon
All the technical analysis programs provide the charts with different time
period and investor chooses more suitable charts for his work. Figure 3
demonstrates depending of such choice of investment horizon by every trader.
Only intraday investor uses tic chart, and only long term investor – month chart,
but everybody – day chart. It is more informative for all participants.
Intraday investor
Shot term investor
Middle term
investor
Long term
investor
Position
Tic
Month
Figure 3 Depending charts by investment horizon
The fundamental moment in this article is the choice of analysis (Figure 4).
Intraday trader has not any possibility to use technical or fundamental analysis. It
is evident that he has no time for technical analysis and knowledge for fundamental
analysis. Such trader usually uses an intuition approach.
Intraday investor
Shot term investor
Middle term
investor
Long term
investor
Kind of analysis
Intuition
Technical and
fundamental
Fundamental and
technical
Fundamental
Figure 4 Depending kind of analysis by investment horizon
One of the most interesting investor is short and middle term trader. All of
these participant groups are using the technical and fundamental analysis but in
different proportions. For short term investor the technical analysis is more useful,
but for middle term – fundamental. A short term trader is using the day chart,
which is characterized by many classical pattern and candle stick pattern as well.
Such investor has a time for analysis of these patterns. Usually he listens
fundamental news too. But he has no time and money for deep fundamental
analysis.
Middle term investor has time and money for fundamental analysis, but he
uses the technical approach too. The level of using each kind of analysis is
demonstrated by the figure 5.
100%
90%
80%
70%
ІА
60%
ТА
FА
50%
40%
30%
20%
10%
0%
Intraday
Shot term
Middle term
Long term
Figure 5 Level of using each kind of analysis by traders with different
investment horizon.
Each group of trader chooses such combination of the methods which is
more useful and suitable for it. For intraday traders: 5% - technical analysis, 95% intuition; for short term traders: 5% - intuition, 10%- fundamental, 85%- technical;
for middle term traders: 5% - intuition, 80%- fundamental, 15%- technical; for
long term traders: 5% - technical, 95%- fundamental. I must say, such definition is
approximate. Traders use the fundamental analysis in 46 cases of 100, technical in
28, intuition in 26. The space of technical analysis figure is not the biggest but all
participants use it.
Why the technical analysis is one of the most popular among short and
middle terms investors? These traders usually use technical analysis because it is
one of the simplest forecasting methods. Many scientists say that technical analysis
is not a science but it is an art because it hasn’t scientific base. B. Mandelbrot,
E. Peters, B. Williams demonstrates the base mistake of this statement. They say
that market is nonlinear system and that is why traditional capital market theory is
not effective. Only deep scientific research of the market’s nature and study of the
basic theories can give answer to the question.
The question of using the technical and fundamental analyses is important
today. All these approaches have strong and weak points. Some of these weak
points can’t be compensated. These problems will be discussed below.
Let’s distinguish typical reaction of FOREX by the new information about
market situation. Allow that market is in order now (exchange rate fluctuates in
some frame). Now the short-term investors are in the market. And other traders are
waiting for the news. If the news is positive one the longer investment horizon
traders will join the market. They will push up exchange rate and destroy the
position of intraday and short-term investors. Than exchange rate will fluctuates in
some frame again. Exchange rate may rise or fall
after all these
movements (Figure 6).
В
С
А
Figure 6 How the exchange rate reacted on the fundamental news
In this example one of the visible fundamental analysis problems is
impossibility to analyze all factors in time. FOREX is very speed market. In
figure 6 we can see the example of classical patterns – “flag”. This fact
demonstrates the connection between technical and fundamental analysis.
Synergetic approach in technical analysis is the alternative understanding of
market process. It reverses the perception of market fluctuation, explains technical
analysis principals and gives new methods for traders. Author (in previous articles)
described R/S analysis. This approach helps us to define fractal dimension index
(FDI). We must define basis parameters – quantity of parameters and kind of
exchange rate (open, close, high, low). Peters insisted for huge data for analysis.
In this research we have studied EUR/USD from 2001 to 2007 (Figure7).
We have used 2064 data (standard exchange rate, average and moving average (5-,
20-, 60-, 120-, 240- day)). For the definition of perfect quantity data we define FDI
with 10, 50, 2064 close exchange rate (Figure 8, 9).
EUR/USD day (2001-2007рр.)
1,6
1,4
1,2
1
0,8
close
0,6
0,4
0,2
20071003
20070804
20070604
20070329
20070124
20061123
20060922
20060722
20060522
20060321
20060117
20051116
20050915
20050715
20050514
20050310
20050107
20041106
20040903
20040703
20040503
20040302
20031229
20031028
20030827
20030625
20030423
20030220
20021218
20021009
20020802
20020529
20020315
20011228
20011027
20010829
20010627
20010427
20010216
0
Figure 7 EUR/USD 2001-2007
FDI 10
1,9
1,8
1,7
1,6
1,5
1,4
1,3
FDI
1,2
1,1
Figure 8 FDI (10day)
20071013
20070706
20070321
20061206
20060825
20060515
20060131
20051020
20050709
20050325
20041213
20040830
20040519
20040205
20031024
20030712
20030331
20021216
20020823
20020429
20011227
20010916
20010608
20010216
1
FDI 50
2
1,9
1,8
1,7
1,6
FDI 50
1,5
1,4
1,3
1,2
1,1
1
1
74
147
220
293
366
439
512
585
658
731
804
877
950
1023 1096 1169 1242 1315 1388 1461 1534 1607 1680 1753 1826 1899 1972
Figure 9 FDI (50day)
What can we see on this figure? The first case shows the diapason of index
oscillation wider then in other but index is a maximal only in a few times. That is
market has a trend. In the second case we have reversal result: index only twice is
1,2, in other cases it is lower. That is market has a strong trend. The general index
is 1,0252151. Summing up I must say, that index is lower if analyst uses big
massive of data and higher in other cases. For general index author has used 2064
data but index has never been 1,5. This fact characterizes market as not a random
phenomenon. Up trend we can see on the figure 7.
We used close courses, average courses and moving average for calculation
fractal dimension index. You can see the results of such calculation in table 1.
Таble 1.
FDI EUR/USD
Price
moving
Close
average
5
20
60
120
240
1,0252151
1,02516
1,0249
1,0248
1,0246
1,0245
1,0242
Moving average is calculated as simple average with range base. Including
close prices in moving average helps to smooth general results many times. If
quantity of prices in moving average increases, the graph becomes slightly. It is
demonstrated the trend to decrees the fractal dimension index while increase the
moving average interval.
If first graph of 5 days moving average (figure 10) characterizes high level
of volatility (FDI=1,0249) then
graph of 240 days moving average will
characterize lower level (FDI=1,0242). Different kinds of courses can be used for
calculating FDI, but close prices are more suitable.
Moving average 5day
1,6
1,4
1,2
1
0,8
Moving average 5 day
20010220 20010516
2001072
2001100
2001121
2002031
2002061
2002083
20021118 20030206 20030421 20030704 20030917
20031129 20040213 20040427 20040709 20040921 20041206
20050217 20050505 20050718 20050929 20051212
20060223 20060509 20060721 20061003 20061215 20070228
20070516 20070731 20071009
0,6
0,4
0,2
0
Moving average 20 day
1,6
1,4
1,2
1
0,8
Moving average 20 day
0,6
20010314 20010602 20010814 20011023 20020104
20020404 20020701 20020917 20021206 20030224 20030508 20030722 20031004 20031217 20040302 20040514 20040727 20041009
20041223 20050307 20050523 20050804 20051017 20051229 20060314 2006052
20060808 20061020 20070102 20070319 20070605 20070817
20071024
0,4
0,2
0
Moving average 60day
1,6
1,4
1,2
1
Moving average 60 day
0,8
0,6
20061104
20070116
20070331
20070616
20070828
20071101
20030116
20030401
20030613
20030826
20031106
200401120040401
20040612
20040824
20041106
20050118
20050331
20050615
20050826
20051107
20060118
20060401
20060613
20060824
20010507
20010714
20010924
20011204
20020227
20020527
20020812
20021030
0,4
0,2
0
1,6
1,4
1,2
0,8
0,6
0,4
0,2
Moving average 120day
1
20010712
20010920 20011129 20020221
20020520 20020802 20021021
20030106 20030320 20030531
20030811 20031022 20040101
20040315
20040525 20040804
20041015 20041227 20050308
20050521 20050801 20051011
0
Moving average 120 day
20051221 20060303 20060513
20060724 20061003 20061213
20070222 20070509 20070721
20070929
Moving average 240day
1,6
1,4
1,2
1
Moving average 240 day
0,8
0,6
0,4
20070514
20070721
20070925
20071121
20011127
20020213
20020430
20020716
20020926
20021209
20030218
20030425
20030702
20030908
20031113
20040120
20040327
200406020040807
20041014
20041221
20050225
20050506
20050712
20050916
20051122
20060127
20060405
20060610
20060816
20061021
20061227
20070305
0,2
0
Figure 10 Moving averages
IV Summary: Summing up I make the conclusion that problems of trading have a
different character but they must be overcome. Not only private persons but other
professional participants such as commercial banks and financial institutes must
happen by the active FOREX traders. Such professional market participants own
the bigger financial and human recourses then private persons. Financial operations
on the FOREX help to increase profit and expand possibilities. Technical and
fractal analysis simplify this process.
The problem of choosing one kind of analysis is the main question in trading
on the FOREX. Last time technical analysis becomes the preferable on the
financial markets. Fractal analysis helps to understand financial market process as
well. Trader with different investment horizons uses different methods of analysis
but all participants use the technical approach. Scientists must not only study
methods of technical and fractal analysis but propose new approaches.
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