Techniqual Analysis

THEORETICAL BACKGROUND

TECHNICAL ANALYSIS

Technical analysis is the examination of past price movements to forecast future price

movements. Technical analysts are sometimes referred to as chartists because they rely

almost exclusively on charts for their analysis.

BASIS OF TECHNICAL ANALYSIS

At the turn of the century, the Dow Theory laid the foundations for what was later to

become modern technical analysis. Dow Theory was not presented as one complete

amalgamation, but rather pieced together from the writings of Charles Dow over several

years. Of the many theorems put forth by Dow, three stand out:

Price Discounts Everything

Price Movements are not Totally Random

What is More Important than Why

Price Discounts Everything:

This theorem is similar to the strong and semi-strong forms of market efficiency.

Technical analysts believe that the current price fully reflects all information. Because all

information is already reflected in the price, it represents the fair value and should form

the basis for analysis. After all, the market price reflects the sum knowledge of all

participants, including traders, investors, portfolio managers, buy-side analysts, sell-side

analysts, market strategist, technical analysts, fundamental analysts and many others. It

would be folly to disagree with the price set by such an impressive array of people with

impeccable credentials. Technical analysis utilizes the information captured by the price

to interpret what the market is saying with the purpose of forming a view on the future.

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Prices Movements are not totally random:

Most technicians agree that prices trend. However, most technicians also acknowledge

that there are periods when prices do not trend. If prices were always random, it would be

extremely difficult to make money using technical analysis.

"One way of viewing it is that markets may witness extended periods of random

fluctuation, interspersed with shorter periods of nonrandom behavior. The goal of the

chartist is to identify those periods (i.e. major trends)."

A technician believes that it is possible to identify a trend, invest or trade based on

the trend and make money as the trend unfolds. Because technical analysis can be applied

to many different timeframes, it is possible to spot both short-term and long-term trends.

The broad trend is up, but it is also interspersed with trading ranges. In between the

trading ranges are smaller up trends within the larger uptrend. The uptrend is renewed

when the stock breaks above the trading range. A downtrend begins when the stock

breaks below the low of the previous trading range.

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What is more important than why?

"A technical analyst knows the price of everything, but the value of nothing".

Technicians, as technical analysts are called, are only concerned with two things:

1. What is the current price?

2. What is the history of the price movement?

The price is the end result of the battle between the forces of supply and demand for the

company's stock. The objective of analysis is to forecast the direction of the future price.

By focusing on price and only price, technical analysis represents a direct approach.

Fundamentalists are concerned with why the price is what it is. For technicians, the why

portion of the equation is too broad and many times the fundamental reasons given are

highly suspect. Technicians believe it is best to concentrate on what and never mind why.

Why did the price go up? It is simple, more buyers (demand) than sellers (supply). After

all, the value of any asset is only what someone is willing to pay for it. Who needs to

know why?

GENERAL STEPS FOR TECHNICAL EVALUATION

Many technicians employ a top-down approach that begins with broad-based macro

analysis. The larger parts are then broken down to base the final step on a more

focused/micro perspective. Such an analysis might involve three steps:

1. Broad market analysis through the major indices such as the S&P 500, Dow

Industrials, NASDAQ and NSE & BSE.

2. Sector analysis to identify the strongest and weakest groups within the broader

market.

3. Individual stock analysis to identify the strongest and weakest stocks within select

groups.

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The beauty of technical analysis lies in its versatility. Because the principles of technical

analysis are universally applicable, each of the analysis steps above can be performed

using the same theoretical background. You don't need an economics degree to analyze a

market index chart. You don't need to be a CPA to analyze a stock chart. Charts are

charts. It does not matter if the timeframe is 2 days or 2 years. It does not matter if it is a

stock, market index or commodity. The technical principles of support, resistance, trend,

trading range and other aspects can be applied to any chart. While this may sound easy,

technical analysis is by no means easy. Success requires serious study, dedication and an

open mind.

CHART ANALYSIS

Technical analysis can be as complex or as simple as you want it. The example below

represents a simplified version. Since we are interested in buying stocks, the focus will be

on spotting bullish situations.

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Overall Trend: The first step is to identify the overall trend. This can be accomplished

with trend lines, moving averages or peak/trough analysis. As long as the price remains

above its uptrend line, selected moving averages or previous lows, the trend will be

considered bullish.

Support: Areas of congestion or previous lows below the current price mark support

levels. A break below support would be considered bearish.

Resistance: Areas of congestion and previous highs above the current price mark the

resistance levels. A break above resistance would be considered bullish.

Momentum: Momentum is usually measured with an oscillator such as MACD. If

MACD is above its 9-day EMA (exponential moving average) or positive, then

momentum will be considered bullish, or at least improving.

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Buying/Selling Pressure: For stocks and indices with volume figures available, an

indicator that uses volume is used to measure buying or selling pressure. When Chaikin

Money Flow is above zero, buying pressure is dominant. Selling pressure is dominant

when it is below zero.

Relative Strength: The price relative is a line formed by dividing the security by a

benchmark. For stocks it is usually the price of the stock divided by the S&P 500. The

plot of this line over a period of time will tell us if the stock is outperforming (rising) or

underperforming (falling) the major index.

The final step is to synthesize the above analysis to ascertain the following:

Strength of the current trend.

Maturity or stage of current trend.

Reward to risk ratio of a new position.

Potential entry levels for new long position.

TOP DOWN TECHNICAL ANALYSIS:

For each segment (market, sector and stock), an investor would analyze long-term

and short-term charts to find those that meet specific criteria. Analysis will first consider

the market in general, perhaps the S&P 500. If the broader market were considered to be

in bullish mode, analysis would proceed to a selection of sector charts. Those sectors that

show the most promise would be singled out for individual stock analysis. Once the

sector list is narrowed to 3-4 industry groups, individual stock selection can begin. With a

selection of 10-20 stock charts from each industry, a selection of 3-4 of the most

promising stocks in each group can be made. How many stocks or industry groups make

the final cut will depend on the strictness of the criteria set forth. Under this scenario, we

would be left with 9-12 stocks from which to choose. These stocks could even be broken

down further to find the 3-4 of the strongest of the strong.

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STRENGTHS OF TECHNICAL ANALYSIS

Focus on Price: If the objective is to predict the future price, then it makes sense to focus

on price movements. Price movements usually precede fundamental developments. By

focusing on price action, technicians are automatically focusing on the future. The market

is thought of as a leading indicator and generally leads the economy by 6 to 9 months. To

keep pace with the market, it makes sense to look directly at the price movements. More

often than not, change is a subtle beast. Even though the market is prone to sudden knee-

jerk reactions, hints usually develop before significant moves. A technician will refer to

periods of accumulation as evidence of an impending advance and periods of distribution

as evidence of an impending decline.

Supply, Demand, and Price Action: Many technicians use the open, high, low and close

when analyzing the price action of a security. There is information to be gleaned from

each bit of information. Separately, these will not be able to tell much. However, taken

together, the open, high, low and close reflect forces of supply and demand.

The annotated example above shows a stock that opened with a gap up. Before the open,

the number of buy orders exceeded the number of sell orders and the price was raised to

attract more sellers. Demand was brisk from the start. The intraday high reflects the

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strength of demand (buyers). The intraday low reflects the availability of supply (sellers).

The close represents the final price agreed upon by the buyers and the sellers. In this case,

the close is well below the high and much closer to the low. This tells us that even though

demand (buyers) was strong during the day, supply (sellers) ultimately prevailed and

forced the price back down. Even after this selling pressure, the close remained above the

open. By looking at price action over an extended period of time, we can see the battle

between supply and demand unfold. In its most basic form, higher prices reflect increased

demand and lower prices reflect increased supply.

Support/Resistance: Simple chart analysis can help identify support and resistance

levels. These are usually marked by periods of congestion (trading range) where the

prices move within a confined range for an extended period, telling us that the forces of

supply and demand are deadlocked. When prices move out of the trading range, it signals

that either supply or demand has started to get the upper hand. If prices move above the

upper band of the trading range, then demand is winning. If prices move below the lower

band, then supply is winning.

Pictorial Price History: Even if you are a tried and true fundamental analyst, a price

chart can offer plenty of valuable information. The price chart is an easy to read historical

account of a security's price movement over a period of time. Charts are much easier to

read than a table of numbers. On most stock charts, volume bars are displayed at the

bottom. With this historical picture, it is easy to identify the following:

Reactions prior to and after important events.

Past and present volatility.

Historical volume or trading levels.

Relative strength of a stock versus the overall market.

Assist with Entry Point: Technical analysis can help with timing a proper entry point.

Some analysts use fundamental analysis to decide what to buy and technical analysis to

decide when to buy. It is no secret that timing can play an important role in performance.

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Technical analysis can help spot demand (support) and supply (resistance) levels as well

as breakouts. Simply waiting for a breakout above resistance or buying near support

levels can improve returns.

It is also important to know a stock's price history. If a stock you thought was great for

the last 2 years has traded flat for those two years, it would appear that Wall Street has a

different opinion. If a stock has already advanced significantly, it may be prudent to wait

for a pullback. Or, if the stock is trending lower, it might pay to wait for buying interest

and a trend reversal.

WEAKNESS OF TECHNICAL ANALYSIS

Analyst Bias: Just as with fundamental analysis, technical analysis is subjective and our

personal biases can be reflected in the analysis. It is important to be aware of these biases

when analyzing a chart. If the analyst is a perpetual bull, then a bullish bias will

overshadow the analysis. On the other hand, if the analyst is a disgruntled eternal bear,

then the analysis will probably have a bearish tilt.

Open to Interpretation: Furthering the bias argument is the fact that technical analysis

is open to interpretation. Even though there are standards, many times two technicians

will look at the same chart and paint two different scenarios or see different patterns.

Both will be able to come up with logical support and resistance levels as well as key

breaks to justify their position. While this can be frustrating, it should be pointed out that

technical analysis is more like an art than a science, somewhat like economics. Is the cup

half-empty or half-full? It is in the eye of the beholder.

Too Late: Technical analysis has been criticized for being too late. By the time the trend

is identified, a substantial portion of the move has already taken place. After such a large

move, the reward to risk ratio is not great. Lateness is a particular criticism of Dow

theory.

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Always another Level: Even after a new trend has been identified, there is always

another "important" level close at hand. Technicians have been accused of sitting on the

fence and never taking an unqualified stance. Even if they are bullish, there is always

some indicator or some level that will qualify their opinion.

Trader's Remorse: Not all technical signals and patterns work. When you begin to study

technical analysis, you will come across an array of patterns and indicators with rules to

match. For instance: A sell signal is given when the neckline of a head and shoulders

pattern is broken. Even though this is a rule, it is not steadfast and can be subject to other

factors such as volume and momentum. In that same vein, what works for one particular

stock may not work for another. A 50-day moving average may work great to identify

support and resistance for IBM, but a 70-day moving average may work better for Yahoo.

Even though many principles of technical analysis are universal, each security will have

its own idiosyncrasies.

CHARTS

A price chart is a sequence of prices plotted over a specific timeframe. In statistical

terms, charts are referred to as time series plots.

VARIOUS TYPES OF CHARTS

We will be explaining the construction of line, bar, candlestick and point & figure charts.

Although there are other methods available, these are four of the most popular methods

for displaying price data.

Line Chart:

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The line chart is one of the simplest charts. It is formed by plotting one price point,

usually the close, of a security over a period of time. Connecting the dots, or price points,

over a period of time, creates the line.

Some investors and traders consider the closing level to be more important than

the open, high or low. By paying attention to only the close, intraday swings can be

ignored. Line charts are also used when open; high and low data points are not available.

Bar Chart:

Perhaps the most popular charting method is the bar chart. The high, low and close are

required to form the price plot for each period of a bar chart. The high and low are

represented by the top and bottom of the vertical bar and the close is the short horizontal

line crossing the vertical bar. On a daily chart, each bar represents the high, low and close

for a particular day. Weekly charts would have a bar for each week based on Friday's

close and the high and low for that week.

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Bar charts can also be displayed using the open, high, low and close. The only difference

is the addition of the open price, which is displayed as a short horizontal line extending to

the left of the bar. Whether or not a bar chart includes the open depends on the data

available.

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Bar charts can be effective for displaying a large amount of data. Using candlesticks, 200

data points can take up a lot of room and look cluttered. Line charts show less clutter, but

do not offer as much detail (no high-low range). The individual bars that make up the bar

chart are relatively skinny, which allows users the ability to fit more bars before the chart

gets cluttered. If you are not interested in the opening price, bar charts are an ideal

method for analyzing the close relative to the high and low. In addition, bar charts that

include the open will tend to get cluttered quicker. If you are interested in the opening

price, candlestick charts probably offer a better alternative.

Candlestick Chart:

Originating in Japan over 300 years ago, candlestick charts have become quite popular in

recent years. For a candlestick chart, the open, high, low and close are all required. A

daily candlestick is based on the open price, the intraday high and low, and the close. A

weekly candlestick is based on Monday's open, the weekly high-low range and Friday's

close.

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Many traders and investors believe that candlestick charts are easy to read, especially the

relationship between the open and the close. White (clear) candlesticks form when the

close is higher than the open and black (solid) candlesticks form when the close is lower

than the open. The white and black portion formed from the open and close is called the

body (white body or black body). The lines above and below are called shadows and

represent the high and low.

Point & Figure Chart:

The charting methods shown above all plot one data point for each period of time. No

matter how much price movement, each day or week represented is one point, bar or

candlestick along the time scale. Even if the price is unchanged from day to day or week

to week, a dot, bar or candlestick is plotted to mark the price action. Contrary to this

methodology, Point & Figure Charts are based solely on price movement and do not take

time into consideration. There is an x-axis but it does not extend evenly.

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Patterns in Technical Analysis.

First of all, there are many patterns that can be used in technical analysis, and many ways

to present them. For example, the Candlesticks charting technique uses patterns, Point-

and-Figure technique uses patterns and so on.

Triangle

The "classical" triangle has at least 5 waves, and the breakthrough happens at about 2/3

of the horizontal size of a triangle. It is not enough for the price to touch the side of a

triangle, the price bar must close outside the triangle, and otherwise we might have a

false signal.

Symmetrical triangles.

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This pattern can be considered as a sign that the market is "uncertain" in which direction

to move. Both buyers and sellers are pushing the price towards some middle value. As it

happens the volume usually is decreasing as everybody is waiting for the price to break

out of the triangle. The moment it happens, the volume is usually increasing - due to

psychological reasons.

It seems that the triangle usually does not change the trend - if the price was going up,

then it is most probable that it will break up from the triangle and vice versa.

Ascending triangles

This pattern is a variation of the Symmetrical triangle. Think of it in terms of "increasing

pressure up and constant pressure down". As the pattern is forming, the volume is

diminishing, and when the breakthrough occurs, the pattern is usually expanding. It is a

useful (but not mandatory) confirmation.

Descending triangles .

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This pattern is a variation of the Symmetrical triangle. Think of it in terms of "increasing

pressure down and constant pressure up”. The length of the pattern should be somewhere

between few weeks and few months. As the pattern is forming, the volume is

diminishing, and when the breakthrough occurs, the pattern is usually expanding. It is a

useful (but not mandatory) confirmation. The price projection equals the maximum

height of the triangle, measured from the resistance breakout point.

Double top

This is a reversal pattern that forms after an up. The important confirmation signal occurs

when the support line is broken after the second peak. The decline after the first peak is

somewhere between 10 and 20 %. The duration of the pattern is somewhere between few

weeks and few months. The size of peaks is nearly equal. The decline from the second

peak may contain gaps and the volume should expand trend. It consists of two peaks. The

price target equals the size of the peak

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Head and shoulders.

When the stock is going up, we can use the concept of a SUPPORT line, the line below

the price, that price is constantly testing but cannot cross. Then when the trend is

changing, the support line is broken and for a short period of time the chart can be

considered horizontal - the temporary support line is called a neckline. Then the price is

trying to reach the previous support line (and to restore the trend) but failing (right

shoulder). This is the first "sell" signal. The second one is happening when the right side

of the right shoulder penetrates the neckline - this sell signal is much stronger. Again as

always, a lot of this strength the pattern gets from the fact that people know about it,

believe in it and when it happens - they begin selling, therefore pushing the price down.

The price target equals the distance between the neckline and top of the head

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Wedges.

Unlike with the triangles, both upper and lower edges are either going up (bearish

formation) or down (bullish formation). The volume is not that important for the rising

wedge, but it is critical for the falling wedge. The volume should expand to confirm the

break of a resistance.

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Flags.

Flags are (sort of) variations of a triangles. They can be explained using the same logic

and they predict the same thing. The pattern is considered part of the trend, which means

that on the uptrend it is a sign that price will continue to increase and on the downtrend it

is a sign that the price will fall. They are usually preceded by a sharp advance or decline

with heavy volume.

Rectangles.

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Same as flags. A temporary slowdown in the trend that usually wouldn't change it. They

are usually preceded by a sharp advance or decline with heavy volume.

Bump and Run Reversal

While drawing a bump, the lead-in (price advice) part of a pattern should be long enough,

at least as long as one month. We should be able to draw a support line. The trend line

should not be very steep, otherwise the bump will be hard to identify. Partially, the

steepness of a trend line can be adjusted by choosing of the X-scale, of course. When the

bump forms, the angle between old and new support line should be about 50% of the

angle between the olds support line and X axis.

Cup with Handle Pattern

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The Cup with Handle Pattern is a bullish continuation pattern. The "cup" part is a pattern,

that forms after advance (as it is a continuation pattern, we need a trend to continue), and

looks as a "round bottom" formation, which can be rephrased as "a local minimum, but

shaped as U, rather than as V". The "handle" part is a trading range (sideways price

movement) that forms after the "cup", and when the resistance of this range is broken, we

are getting a signal that the stock is continuing its move. The handle is one of

consolidation patterns, like the flag, or descending rectangle. It can go down, up to 1/3 of

the cup's advance, but the LESS it goes down, the more bullish the pattern is. The

handle's duration can be 1-4 weeks (ideally).As with most breakouts, we should expect

increase of volume after the "handle is broken”. Finally, the expected advance is equal

the depth of a cup (the distance from the bottom to the right peak).

Rounding Bottom Pattern

The Rounding Bottom is a bullish reversal pattern. It is one of the long-term patterns,

that usually takes many weeks to form - you will not find it on the intraday charts. As it is

a reversal pattern, there should be a downtrend to reverse. The bottom of a pattern is

shaped like U rather than V, and takes few weeks. The right part of the rounding bottom

pattern should take about the same time as the left part. The bullish signal is generated

when the price advances above the left high of a pattern. The volume should decline as

the price is declining and rise as price is rising. There may also be an increase in volume

at the price breakout.

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STATEMENT OF THE PROBLEM

The system of foreign exchange is the result of the business transactions that is

carried on between the countries. Therefore the risk here is more than that compared to

domestic business.

Developments in technology have made things so easy that the individuals can

buy or sell anything sitting in front of their systems. Therefore with increasing trading

facilities, overseas trade is also increasing tremendously. So, there could be changes that

occur in the market every now and then.

This project deals with the problem as to how the government should regulate its

policies so as to check out the fluctuations in the market and bring back it to a stabilized

form and control the activities of the foreign exchange transactions. This in turns helps in

forecasting the future trend, depending upon how the market trend has carried over from

the past few days or months.

Technical analysis is one such tool where the forecasting is done using the past

data so; it has been the main subject of study in this project.

OBJECTIVES OF THE STUDY

To find out the movement of the trend line in the market by taking into

consideration the exchanges rates of the country.

To study the various tools available in the technical analysis.

To be clear with the government policies, regulation and its role and intervention

in forex markets.

To know how the technical tools have been useful in forex market for forecasting

the foreign exchange rates.

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SCOPE OF THE STUDY

The scope of the study is limited only to the foreign exchange market of India

alone which is compared and analyzed only with the rates of US dollars, for the period of

the last five years. No other countries rates are taken into consideration for the study.

RESEARCH METHODOLOGY

Type of research:

Research design is the conceptual structure within which research is conducted. It

constitutes the blue print for the collection, measurement, and analysis of data. The type

of research adopted for the study is descriptive research, as the research does not require

any manipulation of variables and does not establish causal relationship between events;

it just simply describes the variables.

Sources of data:

The data was collected through secondary sources. As this project was a descriptive study

conducted, there was no questionnaire used to collect primary data or any other additional

data.

The secondary data sources are internet, books, annual reports, magazines and other

published data.

PLAN OF ANALYSIS:

The collected information was tabulated and analyzed in detail. Graphs and diagrams

have also been used to explain the findings clearly. Hypothesis testing has been done to

provide adequate support for the findings of the study. Some of the statistical techniques

used were as follows:

Financial calculations

Linear programming techniques

T-test for equality of means

Correlation and regression analysis.

ANOVA.

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Theoretical background is one of the important parts of the dissertation. The very basic

purpose of this is to gain an insight and provide an overview of the study carried on. It

helps the researcher to gain strong theoretical basis of the problem study.

LIMITATIONS OF THE STUDY:

The data is collected only for the period of five years, and the calculation are

done only for that period.

Exchange Rates taken are only US dollars, no other currencies are considered

in the study.

The testing is carried on only for the last six months, and the graphs are drawn

upon that.

The forecasting done depending on the trend may not always be accurate it

may fluctuate due to changes in economy.

There may be changes occurring due to government policies.

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Glossary

Appreciation - A currency is said to 'appreciate' when it strengthens in price in response

to market demand.

Balance of Trade - The value of a country's exports minus its imports.

Bar Chart - A type of chart which consists of four significant points: the high and the

low prices, which form the vertical bar, the opening price, which is marked with a little

horizontal line to the left of the bar, and the closing price, which is marked with a little

horizontal line of the right of the bar.

Base Currency - The first currency in a Currency Pair. It shows how much the base

currency is worth as measured against the second currency. For example, if the

USD/CHF rate equals 1.6215 then one USD is worth CHF 1.6215 In the FX markets, the

US Dollar is normally considered the 'base' currency for quotes, meaning that quotes are

expressed as a unit of $1 USD per the other currency quoted in the pair. The primary

exceptions to this rule are the British Pound, the Euro and the Australian Dollar.

Bear Market - A market distinguished by declining prices

Bull Market - A market distinguished by rising prices.

Candlestick Chart - A chart that indicates the trading range for the day as well as the

opening and closing price. If the open price is higher than the close price, the rectangle

between the open and close price is shaded. If the close price is higher than the open

price, that area of the chart is not shaded

Central Bank - A government or quasi-governmental organization that manages a

country's monetary policy. For example, the US central bank is the Federal Reserve, and

the German central bank is the Bundesbank

Cross Currency Pairs or Cross Rate - A foreign exchange transaction in which one

foreign currency is traded against a second foreign currency. For example; EUR/GBP

Currency symbols

AUD - Australian Dollar

CAD - Canadian Dollar

EUR - Euro

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JPY - Japanese Yen

GBP - British Pound

CHF - Swiss Franc

Currency - Any form of money issued by a government or central bank and used as legal

tender and a basis for trade.

Currency Pair - The two currencies that make up a foreign exchange rate. For Example,

EUR/USD

Currency Risk - the probability of an adverse change in exchange rates.

EURO - the currency of the European Monetary Union (EMU). A replacement for the

European Currency Unit (ECU).

Interbank Rates - The Foreign Exchange rates at which large international banks quote

other large international banks.

Margin - The required equity that an investor must deposit to collateralize a position.

Over the Counter (OTC) - Used to describe any transaction that is not conducted over

an exchange.

Resistance - A term used in technical analysis indicating a specific price level at which

analysis concludes people will sell.

Support Levels - A technique used in technical analysis that indicates a specific price

ceiling and floor at which a given exchange rate will automatically correct itself.

Technical Analysis - An effort to forecast prices by analyzing market data, i.e. historical

price trends and averages, volumes, open interest, etc.

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CHAPTER SCHEME

Chapter: 1 THEORETICAL BACKGROUND OF THE STUDY

This chapter mainly deals with secondary data collected to support the study and

the reasons to problem of study.

Chapter: 2 RESEARCH DESIGN

A research design serves as a bridge between what has been done in the conduct

of study to realize the specified objectives. It is an outline of the projects working.

Chapter: 3 PROFILES

This chapter includes the profile of the industry as well as the company in which

the study is conducted. It also tries to deal with trends and prospects in the industry as

well as the company.

Chapter: 4 ANALYSIS AND INTERPRETATION

In this chapter using the analyzed data we have tried to forecast the trend

movement and how the exchange rates changes to the changes in the economy.

Hypothesis testing has been done using the T-test, regression analysis, and also ANOVA.

Chapter: 5 Summary of Findings, conclusions and Suggestions

In this chapter we will actually include all that we have analyzed and what has

been found. Finally conclude checking whether the objective of the study has been

achieved or not.

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INDUSTRY PROFILE

History of Foreign Exchange

The foreign exchange market (FX or forex) as we know it today originated in 1973.

However, money has been around in one form or another since the time of Pharaohs. The

Babylonians are credited with the first use of paper bills and receipts, but Middle Eastern

moneychangers were the first currency traders who exchanged coins from one culture to

another. During the middle ages, the need for another form of currency besides coins

emerged as the method of choice. These paper bills represented transferable third-party

payments of funds, making foreign currency exchange trading much easier for merchants

and traders and causing these regional economies to flourish.

From the infantile stages of forex during the Middle Ages to WWI, the forex markets

were relatively stable and without much speculative activity. After WWI, the forex

markets became very volatile and speculative activity increased tenfold. Speculation in

the forex market was not looked on as favorable by most institutions and the public in

general. The Great Depression and the removal of the gold standard in 1931 created a

serious lull in forex market activity. From 1931 until 1973, the forex market went through

a series of changes. These changes greatly affected the global economies at the time and

speculation in the forex markets during these times was little, if any.

"Foreign Exchange" is the simultaneous buying of one currency and selling of another.

Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US

Dollar/Japanese Yen (USD/J. The FX market is considered an Over The Counter (OTC)

or 'interbank' market, due to the fact that transactions are conducted between two

counterparts over the telephone or via an electronic network.

Opportunities from Around the World

Over the last three decades the foreign exchange market has become the world's largest

financial market, with over $1.5 trillion USD traded daily. Forex is part of the bank-to-

bank currency market known as the 24-hour Interbank market. The Interbank market

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literally follows the sun around the world, moving from major banking centers of the

United States to Australia, New Zealand to the Far East, to Europe then back to the

United States. Until recently, the forex market wasn't for the average trader or individual

speculator. With the large minimum transaction sizes and often-stringent financial

requirements, banks, hedge funds, major currency dealers and the occasional high net-

worth individual speculator were the principal participants. These large traders were able

to take advantage of the many benefits offered by the forex market vs. other markets,

including fantastic liquidity and the strong trending nature of the world's primary

currency exchange rates.

Differences between other markets& forex markets.

OTHER MARKETS FOREX MARKETS

Limited floor trading hours dictated by the time zone of the trading location, significantly restricting the number of hours a market is open and when it can be accessed.

The Forex market is open 24 hours a day, 5.5 days a week. Because of the decentralized clearing of trades and overlap of major markets in Asia, London and the United States, the market remains open and liquid throughout the day and overnight.

Threat of liquidity drying up after market hours or because many market participants decide to stay on the sidelines or move to more popular markets.

Most liquid market in the world eclipsing all others in comparison. Most transactions must continue, since currency exchange is a required mechanism needed to facilitate world commerce.

Traders are gouged with fees, such as commissions, clearing fees, exchange fees and government fees.

Commission-Free

Large capital requirements, high margin rates, restrictions on shorting, very little autonomy.

One consistent margin rate 24 hours a day allows Forex traders to leverage their capital more efficiently with as high as 100-to-1 leverage.

Short selling and stop order restrictions.

None.

Pattern day traders subject to restrictions requiring account balances in excess of $50,000.

No restrictions. Very low account balances.

30

Forex Trading

For the investor, the goal of Forex trading is to achieve a profit following foreign

currency movements. Forex trading or currency trading is always done in currency pairs.

For example, the exchange rate of EUR/USD on Aug 26th, 2003 was 1.0857. This

number is also referred to as a "Forex rate" or in short - "rate". If the investor bought

1000 Euro, s/he would have paid 1085.70 U.S. Dollars. A year later, the Forex rate was

1.2083, which means that the value of the Euro (the numerator of the EUR/USD ratio)

increased in relation to the U.S. dollar. The investor can now sell the 1000 Euro in order

to receive 1208.30 dollars. Accordingly, the investor is left with $122.60 more than what

he had started with the previous year. However, to know if the investor made a good

investment, s/he needs to compare this investment option to alternative investments. At

the very minimum, the return on investment (ROI) should be compared to the return of a

"risk-free" investment. An example of risk-free investment is long dated U.S.

Government bonds since there is practically no chance for a default, i.e. the U.S.

Government going bankrupt or being unable or unwilling to pay its debt obligation.

While trading on Forex, trade only at a time when you expect the currency you are

buying to increase in value relative to the one you are selling. If the currency you are

buying does increase in value, you must sell the other currency back in order to lock in a

profit. An open trade (or open position), therefore, is a trade in which a trader has bought

or sold a particular currency pair and has not yet sold or bought back the equivalent

amount to close the position.

However, it is estimated that anywhere from 70%-90% of the FX market is speculative.

In other words, in the end, the person or institution that bought or sold the currency has

no plan to take delivery of the currency; rather, they were solely conjecturing the

movement of that particular currency.

Exchange Rate

As currencies are traded in pairs and exchanged one for the other when traded, the rate at

which they are exchanged is called the exchange rate. Majority of the currencies are

traded against the US Dollar (USD). The four next most traded currencies are the Euro

(EUR), Japanese Yen (JPY), Pound Sterling (GBP) and Swiss Franc (CHF). These four

31

currencies make up the majority of the market and are called major currencies or the

majors. Some sources also include the Australian Dollar (AUD) within the group of

major currencies.

The first currency in the exchange pair is referred to as the base currency and the second

currency as the counter or quote currency. The terms currency is thus the numerator and

the base currency is the denominator. The exchange rate tells a buyer how much needs to

be paid in the counter or quote currency to obtain one unit of the base currency. The

exchange rate also tells a seller how much is received in the counter or quote currency

when selling one unit of the base currency. For example, an exchange rate EURO/USD of

1.2083 specifies to the buyer of Euro that 1.2083 USD needs to be paid in order to obtain

1 Euro.

At a given point, time and place, if an investor buys any currency and immediately sells it

(assuming no currency change has occurred), the investor will lose money. The

underlying reason is that the bid price, representing how much will be received in the

counter or quote currency when selling one unit of the base currency is always lower than

the ask price, which represents how much has to be paid in the counter or quote currency

when buying one unit of the base currency. For instance, the EUR/USD bid/ask currency

rates at your bank can be 1.2015/1.3015, representing a spread of 1015 pips, which is

very high in comparison to a bid/ask currency rates that online Forex investors are used

to such as 1.2015/1.2020, with a spread of 5 pips. In general, lower spreads are better for

Forex investors since even they require a smaller movement in exchange rates in order to

be making money by exchanging currencies.

Margin

Banks and/or online trading providers need collateral to ensure that the investor can pay

in case of a loss. The collateral is referred to as Margin and is also known as minimum

security on the Forex. In practice, it is a deposit to the trader's account that will cover

against any currency-trading losses in the future.

Margin enables private investors to trade in markets with high minimum units of trading

by allowing traders to hold a position much larger than account value and Margin trading

enhances the rate of profit, but Margin trading has the tendency to inflate rates of loss, on

top of systemic risk.

32

Leveraged Finance

Leveraged finance with credit, such as that purchased on a margin, is very common in

Forex. The loan/leveraged in the margined account is collateralized by your initial

deposit. This may result in being able to control $100,000 for as little as $1,000.

Five Ways private investors can trade directly or indirectly in FOREX:

The spot market

Forwards and futures

Options

Contracts for difference

Spread betting

A spot transaction

A spot transaction is a straightforward exchange of one currency for another. The spot

rate is the current market price, the benchmark price. Spot transactions do not require

immediate settlement, or payment "on the spot." The settlement date, or "value date," is

the second business day after the "deal date" (or "trade date") on which the transaction is

agreed to by the two traders. The two-day period provides time to confirm the agreement

and arrange the clearing and necessary debiting and crediting of bank accounts in various

international locations.

Risks

Although Forex trading can lead to very profitable results, there are risks involved:

exchange rate risks, interest rate risks, credit risks, and country risks. Approximately 80%

of all currency transactions last a period of seven days or less, while more than 40% last

fewer than two days. Given the extremely short lifespan of the typical trade, technical

indicators heavily influence entry, exit and order placement decisions.

33

IMPORTANCE OF FOREX:

The importance of international trade in the economy of a country is too well

known to need emphasis. A number of advantages flow from international trade. Many

developed nations of the world owe their present status to international trade; many

developing countries place their hopes of development on it. A large number of these

items are either imported or some components of them are imported. Even if an item is

indigenously produced, it may be found that it is made on an imported machine.

Foreign trade and foreign exchange

International trade refers to trade between the residents of two different countries. Each

country functions as a sovereign state with its own set of regulations and currency. The

difference in the nationality of the exporter and the importer presents certain peculiar

problems in the conduct of international trade and settlement of the transactions arising

there from. Important among such problems are:

1. Different countries have different monetary units;

2. Restrictions imposed by countries on import and export of goods;

3. Restrictions imposed by nations on payments from and into their countries; and

4. Differences in legal practices in different countries.

The existence of national monetary units poses a problem in the settlement of

international transactions. The exporter would like to get the payment in the currency of

his own country. For instance, American exporters of machinery to India would like to

get the payment in US dollars. Payment in Indian rupees will not serve their purpose

because Indian rupee cannot be used as currency in the USA. On the other hand, the

importers in India have their savings and borrowings in Indian in rupees. Thus the

exporter requires payment in the currency of the exporter’s country whereas the importer

can pay only in the currency of the importer’s country. A need, therefore, arises for

conversion of the currency of the importer’s country into that of the exporter’s country.

Foreign exchange is the mechanism by which the currency of one country gets converted

into the currency of another country.

The conversion of currencies is done by banks who deal in foreign exchange. These

banks maintain stocks of foreign currencies in the form of balance with banks abroad. For

34

instance, Indian bank may maintain an account with bank of America. New York, in

which dollar balances are held,. In the earlier example, if Indian imports pay the

equivalent rupees to Indian bank, it would arrange to pay American export at New York

in dollars from the dollar balances held by it with bank of America.

Exchange rate

The rate at which one currency is converted into another currency is the rate of exchange

between the currencies concerned. In our illustration, if Indian bank exchanged USD for

Indian rupees at Rs. 44 a dollar, the exchange rate between rupee and dollar can be

expressed as USD 1 = Rs. 44

The rates in the foreign exchange market are determined by the interaction of the forces

of demand and supply are affected by a number of factors, both fundamental and

transitory, the rates keep on changing frequently, and violently too.

Forex as stock

In another sense, the term foreign exchange is used to refer to the very balance held

broad. Used in this sense, the foreign exchange refers to the stock of foreign currencies

and other foreign assets. The foreign exchange management act, 1999, defines:

Forex means foreign currency and includes-

1. Deposits, credits and balance payable in any foreign currency,

2. Drafts, travelers cheques, letters of credit or bills of exchange expressed or drawn

in Indian currency but payable in any foreign currency;

3. Drafts, traveler’s cheques, letters of credit or bills of exchange drawn by banks,

institutions or persons outside India, but payable in Indian currency.”

Balance of payments

BOP is a record of all economic transactions between residents of a country with

outsiders during a specified time period, normally a year. It constitutes the results of

demand for and supply of foreign exchange for various purposes. Since the rate of

exchange between currencies is determined by the forces of demand and supply, BOP is

the fundamental factor in determining the exchange rates. A change in the BOP of a

country will affect the exchange rate of its currency.

35

Economic transactions: - Arises from

1. Movement of goods in the form of exports and imports;

2. Rendering of services abroad and using foreign services;

3. Gifts/grants from one country to another;

4. Investments made abroad or received from abroad;

5. Income on investments received from abroad or remitted abroad or remitted

abroad;

6. Increase or decrease in the international reserves of the country.

Residents with non-residents

Residents include individuals, institutions, corporate bodies, and government departments

etc., domiciled in the country. Units or branches of multinational companies domiciled in

the country are also residents and their transactions with their parent or branches abroad

also are reflected in the BOP. If the economic transaction is between residents only, it is

not included in the BOP.

BOP accounting

In the compilation of the BOP the double entry principle of accounting is used

1. Credit is indicated by the arithmetic sign (+) and represents outflow of real assets

(exports) from the country or incurring liability abroad or decrease in the foreign

assets.

2. Debit is indicated by the arithmetic sign (-) and represents inflow of real assets

(imports) into the country or decrease in foreign liability abroad or increase in

foreign assets.

The plus sign and minus sign indicate respectively the earning and spending of foreign

exchange by the country.

Components of BOP

1. Current account

2. Capital account and

3. Official reserves account.

36

Current account

The current account of the BOP refers to transaction in goods and services, income and

current transfers. In other words, it covers all transactions between residents and non-

residents, other than financial items. It includes

1. Merchandise: - represents exports and imports of commodities from/into India.

2. Invisibles: - includes services, transfers and investment incomes.

Capital account

The capital account represents transfer of money and other capital items and changes in

the country's foreign assets and liabilities resulting from the transactions recorded in the

current account.

1. Foreign investment in India is the amount invested by non-residents in the equity

of entitles in India.

Direct investment

Portfolio investment

2. Loans

3. Commercial borrowings

4. Banking capital

5. Short term credit

Overall Balance

Balance on capital account is the net of inflows and outflows on capital transactions. It is

also appropriate to call this balance on private capital account as this excludes movement

in official reserves. Overall balance is the total of balance on current account and balance

on capital account. It is also called official settlements balance since it must be financed

by official reserves or by other non-reserve transactions that are substitute for reserve

transactions

Errors and Omissions

The sources of debit and credit may vary, the time of recording for each leg of the

transaction may also vary. These differences would be shown separately as errors and

omissions.

37

International Exchange Systems

We saw that the exchange rate between currencies in a foreign exchange market is

affected by a number of factors. The extent to which these fluctuations are allowed is

vastly dependent on the monetary systems adopted.

When countries were under gold standard the value of currency of a country was fixed as

the value of gold of definite weight and fineness. The exchange rate between the

currencies was determined on the relative value of gold content of currencies concerned.

For example, if the gold content of Indian rupee was 5 grains of standard purity, and that

of US dollar 60 grains of standard purity, the rate of exchange between Indian rupee and

US dollar could be determined as under:

1 Rupee = 5/60 = USD 0.0833 or, 1 USD = 60/5 = Rs. 12.

Exchange rates were stable under gold standard because any deviation in the exchange

rate would be set right automatically by the movement of gold between the countries that

such deviation caused. When the paper currency system replaced the gold standard, the

exchange rate was determined by relative purchasing power of the currencies. The

stability in exchange rates gave way to fluctuations with dynamic situation prevailing all

round.

2.1 FIXED AND FLOATING EXCHANGE RATES

Fixed Exchange Rates: - refer to the system under the gold standard where the rate of

exchange tends to stabilize around the mint par value. In present-day situation where gold

standard no longer exists, fixed rates of exchange refer to maintenance of external value

of the currency at a predetermined level. Whenever the exchange rate differs from this

level it is corrected through official intervention. For example, when IMF was instituted,

every member-country was required to declare the value of the currency in terms of gold

and US dollars (known as the par value). The actual market rates were allowed to

fluctuate only within a narrow band of margin from this level.

Floating/Flexible Exchange Rates

Free or floating rates refer to the system where the exchange rates are determined by the

conditions of demand for and supply of foreign exchange in the market. The rates are free

to fluctuate according to the changes in demand and supply forces with no restrictions on

38

buying and selling of foreign currencies in the exchange market. The central bank does

not intervene in the market and any disparity in the balance of payments is adjusted

through the changes in exchange rate that take place automatically in the market.

Flexible rates of exchange refer to the system where the exchange rate is fixed, but is

subject to frequent adjustments depending upon the market conditions. Thus, it is not a

free or floating rate with cent percent flexibility, but is any system providing for

adjustments as and when required.

Advantages of Fixed Exchange Rates

1. Promotion of International Trade - Stable exchange rates providing certainty and

confidence.

2. Promotion of International Investment

3. Facility of Long-range Planning

4. Development of Currency Areas - Proper functioning of regional arrangements

like sterling area or dollar area would be facilitated with the stable exchange rates

5. Prevention of Speculation

6. Helps Small Open Economies

Advantages of Floating Exchange Rates

1. Adjustment of BOP

2. Better liquidity

3. Gains from foreign trade

4. Cost-price relationship

5. Independence of policy.

39

FACTORS DETERMINING SPOT EXCHANGE RATES

The rate of exchange in the market is the outcome of the combined effect of a multiple of

factors constantly at play.

(1) Balance of Payments: Balance of payments represents the demand for and supply of

foreign exchange, which ultimately determine the value of the currency. Exports, both

visible and invisible represent the supply side for foreign exchange. Imports, visible and

invisible create demand for foreign exchange. When the balance of payments of a country

is continuously at deficit, it implies that the demand for the currency of the country is

lesser than its supply. Therefore its value in the market declines and vise versa.

(2) Inflation: Inflation in the country would increase the domestic prices of the

commodities. With increase in prices exports may dwindle because the price may not be

competitive. With the decrease in exports the demand for the currency would also

decline; this in turn would result in the decline of external value of the currency. It may

be noted that it is the relative rate of inflation in the two countries that cause changes in

exchange rates.

(3) Interest Rates: The interest rate has a great influence on the short-term movement of

capital. When the interest rate at a centre rises, it attracts short- term funds from other

centers. This would increase the demand for the currency at the centre and hence its

value.

(4) Money Supply: An increase in money supply in the country will affect the exchange

rate through causing inflation in the country. It can also affect the exchange rate directly.

An increase in money supply in the country relative to its demand will lead to large-scale

spending on foreign goods and purchase of foreign investments. Thus the supply of the

currency in the foreign exchange markets is increased and its value declines. The

downward pressure on the external value of the currency then increases the cost of

imports and so adds to inflation.

(5) National Income: An increase in national income reflects increase in the Income of

the residents of the country. This increase in the income increases the demand for goods

in the country. If there is underutilized production capacity in the country, this will lead

to increase in production. There is a chance for growth in exports too. But more often it

40

takes time for the production to adjust to the increased income. Where the production

does not increase in sympathy with income rise, it leads to increased imports and

increased supply of the currency of the country in the foreign exchange market. The

result is similar to that of inflation and decline in the value of the currency.

(6) Resource Discoveries: When the country is able to discover key resources, its

currency gains value. A good example can be The discovery of North Sea oil by Britain

helped pound-sterling to rise to over USD 2.40 from USD 1.60 in a couple of years.

(7) Capital Movements: There are many factors that influence movement of capital

from one country to another. Short-term movement of capital may be influenced by the

offer of higher interest in a country. If interest rate in a country rises due to increase in

bank rate or otherwise, there will be a flow of short-term funds into the country and the

exchange rate of the currency will rise. Reverse will happen in case of fall in interest

rates.

(8) Political Factors: Political stability induces confidence in the investors and

encourages capital inflow into the country. This has the effect of strengthening the

currency of the country. On the other hand, where the political situation in the country is

unstable, it makes the investors withdraw their investments. The outflow of capital from

the country would weaken the currency.

(9) Psychological Factors and Speculation: In the short run, the exchange rate is

affected mostly by the views of the participants in the market about the likely changes in

the exchange rates. These expectations are based on many of the factors listed above.

Whenever there is a discrepancy between the previously held expectation of a given

factor and actual outcome of it, exchange rates will usually be affected.

41

ANALYSIS:

This study was concerned with forecasting carried out in a foreign exchange

market using the technical tools available. Data was collected for the past five years and

the fluctuations in the market were noted down.

Initially, analysis was done by taking differences, and the following results were as follows:

Table 1

This table displays the number of cases, mean value, standard deviation of the first,

second and third differences. To test whether the differences were small, the one-sample

t-test was applied, as follows:

Table 2

N Mean Std. Deviation

FIRSTDIF 1113 2.424E-04 .1058

SECDDIFF 1112 -7.9946E-05 .1522

THIRDDIF 1111 -9.1719E-05 .2624

test value= 0t df Sig. (2-tailed)

FIRSTDIF .076 1112 .939

SECDDIFF -.018 1111 .986

THIRDDIF -.012 1110 .991

42

Interpretation: A low significance value (below 0.05) indicates that there is a significant

difference between the test value and the observed mean. Here in this table we can see

that as the significance value is more than 0.05, therefore the first, second and third

differences are not significant (i.e. can be taken to be 0).

Next, the correlations between the exchange rate and the lags were computed, as

follows:

Table 3

Interpretation: There is significant strong correlation (very close to +1) of the exchange

rate with the first, second, and third lags.

This suggests that it may be possible to linearly regress exchange rate on the lags.

This was performed, and the correlations were as follows:

Table 4

EXCHRATE FIRSTLAG SECDLAG THIRDLAG EXCHRAT

EPearson

Correlation1.000 .998 .996 .994

Sig. (1-tailed)

. .000 .000 .000

N 1114 1113 1112 1111 FIRSTLAG Pearson

Correlation.998 1.000 .998 .996

Sig. (1-tailed)

.000 . .000 .000

N 1113 1113 1112 1111 SECDLAG Pearson

Correlation.996 .998 1.000 .998

Sig. (1-tailed)

.000 .000 . .000

43

Unstandardized Coefficients

Standardized Coefficients t Sig.

B Std. Error

Beta

(Constant) .112 .094 1.187 .236

FIRSTLAG .950 .022 .950 43.990 .000

THIRDLAG 4.769E-02 .022 .048 2.210 .027

Dependent Variable: EXCHRATE

The unstandardized coefficients are the coefficients of the estimated regression model.

Often the independent variables are measures in different units. The standardized

coefficients or betas are an attempt to make the regression coefficients more comparable.

Interpretation: The exchange rate is significantly in terms of the first lag and the third

lag. Moreover, comparing their beta values, it can be said that the first lag is twenty times

more important than the third lag in explaining the exchange rate.

Table 5

Model SummaryPredictors: (Constant), FIRSTLAG, THIRDLAGDependent Variable: EXCHRATE

Interpretation: The regression of the exchange rate with the lags explains 99.6% of the

variation in the exchange rate.

Table 6

ANOVA

R R Square Adjusted R Square

Std. Error of the

Estimate

Durbin-Watson

.998 .996 .996 .1058 1.969

Sum of Squares

df Mean Square F Sig.

Regression 2746.546 2 1373.273 122598.567 .000

Residual 12.378 1105 1.120E-02 Total 2758.923 1107

44

Predictors: (Constant), FIRSTLAG, THIRDLAGDependent Variable: EXCHRATE

Interpretation: The regression is significant.

Graph 1

Interpretation: The residuals were symmetrically distributed, but not quite normally.

The support and resistance lines for the exchange rate series was fit using a linear

programming technique, and only six months data was taken for testing of hypothesis.

This works as

45

follows: Min E subject to constraints

Graph 2

  01/10/2004 45.3500 b=0  04/10/2004 45.3100 E=0.14  05/10/2004 45.3000  06/10/2004 45.3100  07/10/2004 45.2700  08/10/2004 45.2800  11/10/2004 45.2700  12/10/2004 45.2500  14/10/2004 45.2600  15/10/2004 45.2500  18/10/2004 45.2600  19/10/2004 45.2500  20/10/2004 45.2900  21/10/2004 45.2800  25/10/2004 45.2700  26/10/2004 45.2900  27/10/2004 45.2900  28/10/2004 45.2700  29/10/2004 45.2400  01/11/2004 45.2600  02/11/2004 45.2400  03/11/2004 45.2400  04/11/2004 45.3000  05/11/2004 45.3100  08/11/2004 45.2500  09/11/2004 45.2100  10/11/2004 45.2300  11/11/2004 45.2500  16/11/2004 45.2700  17/11/2004 45.2500  18/11/2004 45.2400  19/11/2004 45.2500  22/11/2004 45.2200  23/11/2004 45.2200

46

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US

D R

AT

ES

Series1

Graph 3

  24/11/2004 45.1500 b=0  25/11/2004 44.9300 E=1.76  29/11/2004 44.7600  30/11/2004 44.7500  01/12/2004 44.7300  02/12/2004 44.1200  03/12/2004 43.3900

47

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Series1

Here in this second graph for the period 24/11/2004 to 03/12/2004 we can see that the

market falls down by few points due to changes in the economy which is indicated by the

red line and we can also see that it falls even more in the further coming days.

  06/12/2004 43.7700 b=0.0666  07/12/2004 43.6700 E=0.59  08/12/2004 43.7800  09/12/2004 43.5600  10/12/2004 43.6200  13/12/2004 43.6500  14/12/2004 43.7600  15/12/2004 43.9000  16/12/2004 43.8900  17/12/2004 43.8600  20/12/2004 44.0000  21/12/2004 44.0000  22/12/2004 44.0400  23/12/2004 44.1600  24/12/2004 44.1800  27/12/2004 44.1800  28/12/2004 44.4100

48

  29/12/2004 44.3700  30/12/2004 44.9700  31/12/2004 44.7600

Graph 4

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In this last graph for the year 2004 for the period 06/12/2004 to 31/12/2004 we can see

that there is a slight raise in the market due to the favorable factors and in the end there is

a high though it is not as much as it was in the beginning.

Graph 5

  03/01/2005 44.6900 b=0.1025  04/01/2005 44.7100 E=0.425  05/01/2005 44.9500  06/01/2005 45.3400  07/01/2005 45.4200  10/01/2005 45.1200  11/01/2005 45.4400

49

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Series1

Series2

In the beginning of the year we can see that the market is low but it starts rising higher

which is a good start. Though the period is small there is a considerable rise which makes

the trend move upwards indicating growth in the market.

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Graph 6

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Series2

Here in this graph we can see that the market is not stable it decreases at a point and starts

increasing every now and then between the period 17/01/2005 to 28/01/2005 though there

was a little fall in the middle it was not too much and the market has recovered quickly.

  17/01/2005 45.2500 b = 0.038  18/01/2005 45.3300 E = 0.132  19/01/2005 45.3700  20/01/2005 45.3600  24/01/2005 45.3400  25/01/2005 45.4500  27/01/2005 45.3900  28/01/2005 45.5600

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Graph 7

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Series1

Series2

The increasing trend in the previous graph does not stay for a long period as we said

that there is no stabilization existing in the market so the trend also keeps on changing.

We can notice a slight fall during the period 31/01/2005 to 08/02/2005.

  31/01/2005 45.4500 b=0  01/02/2005 45.4200 E=0.47  02/02/2005 45.3100  03/02/2005 45.1900  04/02/2005 45.0600  07/02/2005 45.0900  08/02/2005 44.9800

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Graph 8

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Series2

As we see in this graph after a fall the market is rising to an extent. There is a drastic rise

as compared to the last graph where we see only minor rise or fall. By seeing this we can

also forecast that the market will raise further to an extent with the favorable conditions

affecting them.

  09/02/2005 45.0700 b=0.095  10/02/2005 45.0900 e=0.075  11/02/2005 45.2600  14/02/2005 45.2800  15/02/2005 45.3900  16/02/2005 45.5400  17/02/2005 45.6300  18/02/2005 45.8200

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Graph 9

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Series2

As in the last graph where we saw the trend line increasing to an extent, here it continues

the flow and reaches a peak after which it falls and rises frequently (line showing the

period between 21/02/2005 to 16/03/2005). In this we can also see that there are two

higher peaks created and 2 or more lowers ones.

  21/02/2005 46.2000 b= -0.00813  22/02/2005 46.0600 E=.3375  23/02/2005 45.8300  24/02/2005 45.9000  25/02/2005 45.8400  28/02/2005 45.9600  01/03/2005 45.9800  02/03/2005 45.8800  03/03/2005 45.9600  04/03/2005 45.7500  07/03/2005 45.9800  09/03/2005 45.9500  10/03/2005 45.7300  11/03/2005 45.7600  14/03/2005 45.6400  15/03/2005 45.8200  16/03/2005 45.9400

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Graph 10

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Series2

In this last graph we can see that a market falls to a greater extent during the period

17/03/2005 to 31/03/2005 after a series of peaks (rise in the market) as indicated in the

previous graph but here we can also see that after some time the market is coming to a

stabilized form at the end where we can forecast that the market will raise in the next few

days.

  17/03/2005 43.6300 b=0.13333  18/03/2005 43.6900 E=0.0133  21/03/2005 43.6700  22/03/2005 43.7700  23/03/2005 43.7400  24/03/2005 43.8300  28/03/2005 43.8100  29/03/2005 43.7900  30/03/2005 43.8200  31/03/2005 43.7500

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Testing of hypothesis:

Null hypothesis (Ho): b = 0, which states that there is no significant trend.

Alternate hypothesis (H1): b ≠ 0, which states that there is significant trend.

The test statistic is t =

Table 7

Table 8

Descriptive Statistics

9 -.008130 .13333333 ******** 5.3584E-02

9 .01333333 1.760000 ******** .5334594585

9

b

E

Valid N (listwise)

N Minimum Maximum Mean Std. Deviation

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Interpretation: The p-value (the significance value) was found to be less than 0.05,

indicating that there is a significant positive trend.

Therefore by seeing the above graphs and hypothesis we can say that the market

is not the same at all the times or for a longer period, but it changes frequently due to the

ups and downs that occur in the economic transactions in the country which makes the

exchange rate to raise or fall.

The point in which the trend lines falls or rises is the point where there is a need for

government intervention, where they need to control the currency fluctuations which

have an adverse effect on the economy. The ways in which government interferes and

stabilizes are explained before in the theoretical backgrounds.

It is through such activities that the central bank has been able to deal with the

challenge of excess liquidity created by the accretion of excess foreign reserves. But this

implies that dollars flowing into the country and earning relatively high rates of return in

dollar terms end up in the hands of the central bank, which parks them at extremely low

rates of interest in liquid investment, including US government Treasury Bills. The

difference in the rate of return earned on the inflow by foreigners and that earned by the

RBI on its investments constitute a net foreign exchange outflow from the country.

One-Sample Test

2.659 8 .029 ********* ******** ********

2.464 8 .039 ********* ******** ********

b

E

t df Sig. (2-tailed)Mean

Difference Lower Upper

95% ConfidenceInterval of theDifference

Test Value = 0

57

Summary of findings:

For anyone active in the markets, market contacts and dialogue are necessary to

have a good read on the market. Through dialogue, one gains a sense of what others are

thinking and are likely to do. This in turn helps form one’s own opinion about what is

important and what is likely to occur. Newcomers to such forecasting need to determine,

what basic framework is required for forecasting. Anyone attempting to forecast the

markets should also trade the market at the some time. Some of the findings are:

Every market whether stock market or foreign market has its own swings, it is

clear that markets can’t be beaten on a consistent basis.

Markets movements are influenced by various factors, so not necessarily markets

should always behave rationally.

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There is always market factors at work of which one is unaware. Sometimes they

help; sometimes they do not.

Depending upon someone else’s market decision is of little value, unless one is

actually taking charge and assumes responsibility for the decision.

The changes in economy and government policies effect to a greater extent while

determining the exchange rates.

One should first identify the key bullish and bearish market.

There are fluctuations in the exchange rates sometimes very often & sometimes it

is stable over a period of time.

Forecasting will not work if the markets are inefficient.

Suggestions:

The fundamentals of the foreign exchanges are very important and

necessary while dealing with the foreign exchange markets, there fore every

individual should have sound basics of the foreign market transactions.

We can predict the future using technical analysis for particular set of

range, so it is very important to track market and various other factors affecting the

market movements.

Exchange rates reflect all the information about the markets, so

information regarding the government regulations and policies, various other factors

regarding the forex market has to be clear while forecasting.

59

We should keep a track of the variations that occur in various currencies

and their movements in order to make significant forecasting of exchange rates.

Government intervention plays a major role in the movement of foreign

exchange rates, hence it is necessary to have knowledge regarding its movements

with respect to the foreign exchange markets.

CONCLUSION

The exchange rate is a critical price in an economy, and active management of the

rate may be considered important, not only for the economy in question, but in some

cases, for the global economy.

Markets do get carried away by many political events, such as elections and

budgets, which usually cause a currency to weaken because of the uncertainty involved.

On some occasions, the market may be very sure of the outcome, and will trade based on

that expected outcome and what it means for the currency. It is difficult to justify a move

in the market. Good business decisions sometimes become bad ones simply because of

unfavorable currency movements. International economy growth is facilitated by stable

prices, which central banks have a responsibility to try to achieve. Central banks may

seek only to reduce volatility, or they may attempt to nudge the rate in a particular

direction.

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Therefore after considering all the various factors and situation we can say that

the study carried on in this project would be helpful to understand how to forecast a

market by the help of technical analysis through the help of graphs and thus predict the

future movement of the trend. And it also helps us to know how the government

regulations favor the exchange rates.

BIBLIOGRAPHY

Websites:

www.rbi.org

www.easyforex.com

www.gftforex.com

www.stockscharts.com

www.indiainfoline.com

www.ac-markets.com

www.etgmr.com

www.forex.com

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Journals and books referred:

Financial Risk Management Published By ICFAI.

Risk Management In Foreign Exchange. -by Jeevanandham

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