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Enron Mail |
Stinson,
Can you please take a quick look and fwd it to Sam Smith (wsmith2@enron.com) Vince ---------------------- Forwarded by Vince J Kaminski/HOU/ECT on 05/07/2001= =20 09:59 AM --------------------------- VKaminski@aol.com on 05/06/2001 07:59:33 PM To: vkamins@enron.com cc: =20 Subject: Newsletter A reminder: this column serves two objectives. The firstis introduction of = =20 new members of the Research Group, and of the associates andsummer interns = =20 rotating through the group. The second objective is to reviewinteresting = =20 publications related to energy markets, quantitative finance andother topic= s =20 of interest to the Enron audience. I have run out of the newmembers to =20 introduce and it=01,s time to some real work.=20 Today=01,s column is devoted to the issue of technicalanalysis. Financial = =20 economists tend to dismiss technical analysis (chartism) asvoodoo science. = =20 Over the last few years, however, a significant amount ofevidence that =20 technical analysis works at least in some markets. A paperpublished recentl= y =20 by Carol Osler of Federal Reserve Bank of New York (CurrencyOrders and =20 Exchange-Rate Dynamics: Explaining the Success of Technical Analysis)review= s =20 two cases in which technical analysis proved quite successful inoffering = =20 useful predictions in the foreign currency markets. The firstprediction is = =20 that trends tend to be reversed at identifiable support orresistance levels= . =20 The second is that if a support or resistance level isbreached, trends tend= =20 to accelerate.=20 The explanation of this success can be found, according toCarol Osler, in= =20 the =20 microstructure of the F/X market: take-profit and stop-lossorders tend to = =20 cluster around certain typical levels (like exchange rate endingin a=20 specific =20 market at 00 or 50 level). For example, the author found thatthat roughly = =20 2.8% of all stop-loss buy orders are triggered when the rate hitsa round = =20 number, while 10.5% of take profit sales orders are triggered. Thisasymmetr= y =20 explains the success of the first prediction of technical analysis. Asecond= =20 asymmetry is related to clustering of orders just above and just belowround= =20 numbers ending in 50 and 00. Stop-loss buy orders are infrequent at=20 ratesjust =20 below these levels, and cluster above these levels. Stop-loss sell =20 orders,however, cluster just below 00 and 50 levels a relatively scarce at = =20 rates justabove these levels. =20 The question remains, why conditional orders tend tocluster at certain =20 levels. One possibility is cognitive advantage tradersderive from managing = =20 large volume of information using simplified rules.Another possibility is = =20 that they follow recommendations of technical analysisin managing their =20 books. In this case, technical analysis becomes aself-fulfilling prophecy.= =20 Please, contact us for thecopy of the paper if this caught your attention. - wjk0506.doc
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