Support for Resistance: Technical Analysis and Intraday Exchange Rates

arly in the morning of each business day, the major foreign exchange trading firms send their customers lists of technical trading signals for that day. Timely technical signals are also supplied by major real-time information providers. These signals, which are based primarily on prior price and volume movements, are widely used by active foreign exchange market participants for speculation and for timing their nonspeculative currency transactions. In fact, 25 to 30 percent of foreign exchange traders base most of their trades on technical trading signals (Cheung and Chinn 1999; Cheung and Wong 1999). More broadly, technical analysis is used as either a primary or secondary source of trading information by more than 90 percent of foreign exchange market participants in London (Allen and Taylor 1992) and Hong Kong (Lui and Mole 1998). The technical trading signals provided to customers vary over time and across technical analysts, but the vast majority of the daily technical reports include “support” and “resistance” levels. According to technical analysts, support and resistance levels are points at which an exchange rate trend is likely to stop and may be reversed. For example, a firm publishing a support level of $1.50/£ would claim that the dollar-pound exchange rate is likely to stop falling if it reaches $1.50/£. If the firm also provided another support level of $1.45/£, the firm would claim that if the exchange rate passes through $1.50/£, it is likely to stop falling at $1.45/£.