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1、Forecasting exchange rate:part 1,WONG Ka Fu10th January 2001,If you are looking for awhite or black,or black&white cat,I am your perfect choice.,Content,A taste of technical analysisA taste of time-series forecastingFundamental analysis:Factors that affect the movement of exchange rates,A taste of t
2、echnical analysis,Technical analysis,Technical analysis is a method to forecast price movements of individual commodities and/or entire markets by looking at purely market-generated statistics-abstract summaries of price activity.,Three tenets of technical analysts,All market fundamentals are depict
3、ed in the actual market data.History repeats itself.Prices move in trends.,1.All market fundamentals are depicted in the actual market data.,Thus actual market fundamentals and various unquantifiable meta factors,such as the differing opinions,hopes,fears,and moods of market participants,need not be
4、 studied.,2.History repeats itself.,History repeats itself,such that markets move in fairly predictable,or at least quantifiable,patterns.These patterns,generated by price movement,are called signals.The goal in technical analysis is to uncover the current markets signals by examining past market si
5、gnals.,3.Prices move in trends,Technicians typically do not believe that price fluctuations are random and unpredictable.(Most reject the weak-form explanation of market efficiency and dismiss the random walk theory.)Prices can move in one of three directions,up,down or sideways.Once a trend in any
6、of these directions is in effect it usually will persist.A price chart will usually indicate the prevailing trend as characterized by a series of waves with obvious peaks and troughs.It is the direction of these peaks and troughs that constitutes the market trend.Technical analysis attempts to deter
7、mine the strength and direction of the trend and the change in the trend direction.,The building blocks of any technical analysis system include,Price charts and Technical indicators,Both are merely mathematical representations of market patterns and behaviors.Forecasting models usually include at l
8、east one type of indicator in relation to a particular type of price chart and look for divergence or continuity between indicators and price to determine the validity of a trend.,Some of the price charts used in technical analysis:,Chart patterns are hills and valleys,shapes and curves that develop
9、 over time on a chart which often indicate changes in price direction.Candlestick pattern are like bar charts patterns.It can be used to forecast the market.Because of their colored bodies,candlesticks visually represent greater detail in their chart patterns than bar charts.Point and figure pattern
10、s are essentially the same patterns found in bar charts but transposed on charts with no time scale,Head and Shoulders are a reversal pattern consisting of three price peaks,the middle being the largest.Its potential in the opposite direction is measured by the distance from top of middle(head)to th
11、e base(neckline).This price distance is extrapolated from neckline at the point of breakout.,Double tops and double bottomsare reversal patterns consisting of two peaks with a price valley.To confirm pattern,prices must form a pullback(decline below and close below previously established low).To pre
12、dict move size,measure height from high to low and project under beltline(Vice versa for double bottom),Flags and pennantsare continuation patterns,usually a pause in fast,or almost vertical,price movement.Flags are in the shape of a parallelogram,while pennants are very short triangles.,Broadeningi
13、s a reversal pattern usually found at trend peaks rather than lows.,Trianglescan be continuation and reversal patterns,this usually determined by the direction which they point.Confirmation is at breakout,and the strongest signals are when breakout occurs between 1/2 and 3/4 the triangle length.Asce
14、nding triangles:bullish Descending triangles:bearishSymmetrical triangles:neutral,Saucersare reversal patterns which are slow and rounding in form(at the end of a move).No clear breakout signals occur because it is so slow;no clear Support/Resistance areas are found either.This pattern can last a lo
15、ng time.Be on the lookout for any trending activity.,Gapsare areas in charts where no trading occurs and are usually continuation patterns.Runaway gapshave strong fundamentals behind move,are not quickly filled.Exhaustion gapsare usually the largest gap,usually filled,and have blow-off characteristi
16、cs.Breakaway gapsare at end of price pattern or when breaking major support(or resistance),and are usually filled.,Candle sticks,Point and Figure chartsIn a point and figure chart,Xs are for advancing prices and 0s are for declining prices.When the market reverses direction by the defined amount,a n
17、ew column starts to the right at the corresponding price level.If the price moves in either direction by less than the certain amount(the minimum interval),no new marks will be made,no matter how much time passes.,Some of the Technical indicators used in technical analysis:,Trend indicators smooth v
18、ariable price data to create a composite of market direction.Market strength indicators describe the intensity of market opinion with reference to a price by examining the market positions taken by various market participants.Volatility indicators describe the size of day-to-day price fluctuations i
19、ndependent of their direction.Cycle indicators determine the timing of a particular market patterns.,Some of the Technical indicators used in technical analysis:,Support and resistance indicators describe the price levels where markets repeatedly reverse.Momentum indicators determine the latent stre
20、ngth or weakness of a trend as it progresses over time.,Interested in more technical analysis of financial data?,ECO 3140:Financial Data Analysis(taught by Prof.CHONG Tai Leung)keystone-provides a useful introduction to technical analysis:http:/www.keystone-,Technical traders in our simulation game,
21、Based on simple average rulesBuy Yen if the narrow window(n)moving average of Yen per USD is higher than its corresponding wide window(w)moving average.Let MA(t,m)=p(t-1)+p(t-m)/m For wn,the technical trading signal is buy if MA(t,n)MA(t,w)sell if MA(t,n)MA(t,w),A taste of forecasting,1.Forecasting
22、based on past time-series data,Time-series model,ARMA(p,q):s(t)=a(0)+a(1)s(t-1)+a(p)s(t-p)+e(t)+b(1)e(t-1)+b(q)e(t-q)Based on a sample of T observations,s(1),s(T),estimate a(0),a(1),a(p),b(1),b(q).Es(t+1)|t=a(0)+a(1)s(t)+a(p)s(t-p+1),Other time-series models,ARIMA(p,I,q)ARfiMA(p,d,q)Neural NetworksD
23、ata-mining,Interested in forecasting?,ECO3131:Applied Forecasting Methods(taught by Prof.CHOU Win Lin),mainly on linear time series.,2.Forecasting based on fundamentals and economic models,We will revisit this topic near the end of this semester.We have to know the fundamentals that affect exchange
24、rate before we can have a intelligent discussion.,Factors that affect the movement of exchange rates,1.Central bank is important,Monetary policy toolsshort-term interest rate(e.g.,Fed funds rate)discount rateMonetary policy is a response to what?Inflationeconomic growthexchange rate level or volatil
25、ityTry to read the minds of central bankers,2.Economic data,News announcement of leading and lagging indicatorsMoney supplyConsumer price indexUnemploymentBalance of paymentGDPIndustrial productionA calendar of news announcement is important,3.Expectations,As reflected in futures contractsAnything expected should have been reflected in the market price.Only the unexpected news will move the market.A 0.5%cut in US Fed funds rate on Jan 3,2001 shook the market because the market generally expected only a 0.25%cut.,4.Other factors,Cross rate effectPolitical factors,
