Page 68 - Ultimate Guide to Currency Trading

This upward movement has happened for many reasons, and one of the reasons is that the
Fibonacci series is a technical indicator that traders use to determine reversal points of currency pairs.
In this case, the mid-line is the average of the EUR/CHF pair, and the lower line is the support point of
the pair. Technical traders use this bottom line to determine the point that the pair (in this case the
EUR/CHF), will have difficulties breaking through. In other words, there is a support at this level. In fact,
this is what your broker's reports will be referring to when they give advice about an FX pair: Your FX
broker will issue a report that will say, "The EUR/CHF has support at this level, etc." These are two
examples of using technical indicators to help you determine the timing of an otherwise previously
determined currency trade.

The Theories Behind Technical Analysis

You can learn to use technical indicators to strengthen your conviction as to when it is the appropriate
time to get into a trade and get out of a trade. If you allow the three basic ideas of the professional
technical traders to be true, you would accept the reading of the charts to supplement your
fundamental analysis.

TABLE 8-1: THE THREE THEORIES BEHIND TECHNICAL ANALYSIS

Theory Name Description of Theory
Crowd Psychology Crowds move in the same direction
Efficient Market Hypothesis All information is reflected in the pair's exchange rate
Pairs Revert to the Mean History repeats itself

The crowd psychology idea allows you to accept the fact that if an FX pair is moving along a
path, then it will most likely continue to move along that path in the same direction. With crowd
psychology, the thinking is that the pair will continue to move along the path in the same direction
until there is an event to change the ideas of the people in the crowd (the other FX traders in the
market). This continuing along the same path happens because everyone in the FX market has access
to the same information (efficient markets hypothesis).

The development of the efficient markets hypothesis (EMH) has a long history, starting
with a financial model designed by a French stockbroker Jules Regnault in the 1860s.
Around 1900 that model was developed further mathematically by Louis Bachelier, and
then finalized by Eugene Fama in the 1960s.

With everyone following everyone else, a huge momentum can develop. This is true because
as the FX pair starts to move (up or down), it will gain strength and speed as the rest of the world's