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Chartism

Contributed by David Johnson

Commercial foreign exchange dealer

Halo Financial Ltd

IT HAS been amazing how many calls I have had from readers of The Resident in the past few weeks with queries on exchange rates, ranging from Sterling-Euro to Euro-Yen, Euro-Rand and even Polish Zloty-US Dollar.

I and my colleagues on the Dealing Desk at Halo Financial are trained as Technical Analysts. I am very grateful for that because it provides us with an immediate insight into any currency pair, even if we are less au fait with the dynamics of the economies of the countries involved.

Technical analysis, for those who are wondering what on earth I am talking about is the act of assessing graphs and charts to determine the likely fortunes of financial markets, but we use the technique for foreign exchange. Whether this is an art, science or mythology is open to question, but there is no doubt that there are times when chartists are in great demand, particularly when the economic data is so very ambiguous – just as it is at the moment.

With the debate raging over whether EU interest rates will rise, whether UK interest rates will rise above five per cent and whether the US interest rates are due for a cut, every nuance of data release and central banker comment is greeted with an overreaction, making it hard to determine the overall trend. This volatility means that the top and bottom levels of the trading range start to form patterns. These exchange rate movements can be analysed for repetitive patterns, reversal signals, retracement levels and projected movements.

Most chartists use age old mathematical formulae to assess the likely direction and end point of trends and these are fundamental to the positioning of buy and sell levels for speculative investors. However, we use these same forecasting tools to help those who need to buy currency for migration and property purposes. With the right information, everyone can make better informed decisions about when to exchange their funds, and that has to be a boon.

Not only that, if the exchange rate is fantastic, but the timing is not quite right, it is perfectly possible to secure the rate for a date that is suitable.

As an example of the art/science/myth of Chartism, the Pound has rallied today to the very top of a trading range, which has capped the market since December 2002. Each time the Pound has managed to reach this line, it has been overcome by Euro buyers and the exchange rate has fallen. The buyers have been leaping into the market at increasingly low levels so that the top of the range is now as low as 1.4960 Euros (0.6685 Pounds Sterling).

Not only that, but each fall has been met by Pound Sterling buyers at increasingly high levels, forming a rising trend line at the bottom of the range. The effect is to create a triangular pattern, which will either reach an apex somewhere in the middle or result in a substantial break out with a rapid rise or fall in the exchange rate.

Now, chartists are not always capable of predicting the direction of the breakout, but watch 1.5000 Euros and 1.4400 Euros, because anything outside of this range will herald a major move.

I could go on to explain why and the likely extent of the movement, but I would need another thousand words to do so and I would probably have to wake you up before I had finished.

David Johnson can be contacted on Tel. ++ 44 (0) 207 350 5470 or via e-mail at david.johnson@halofinancial.com