INTERNATIONAL JOURNAL OF FINANCE AND ECONOMICS

Int. J. Fin. Econ. 6: 81–93 (2001)

IMPORTANCE OF TECHNICAL AND FUNDAMENTAL ANALYSIS IN

THE EUROPEAN FOREIGN EXCHANGE MARKET
THOMAS OBERLECHNER*
Webster Uni6ersity, A-1220 Vienna, Austria

ABSTRACT
This article presents findings of a questionnaire and an interview survey on the perceived importance of
chartist/technical and fundamental analysis among foreign exchange traders and financial journalists in Frankfurt,
London, Vienna, and Zurich. Results confirm that most traders use both forecasting approaches, and that the shorter
the forecasting horizon, the more important chartist/technical analysis is. Financial journalists put more emphasis on
fundamental analysis than do foreign exchange traders. Results indicate that the importance of chartism may have
increased over the last decade. Regarding the use of chartist/technical and fundamental analysis on seven forecasting
horizons, four distinct clusters of traders can be identified. Forecasting styles and the overall importance attached to
fundamental versus chartist/technical analysis vary across different trading locations. Foreign exchange traders
mention a series of psychological motives and consequences of the use of chartism. Copyright © 2001 John Wiley &
Sons, Ltd.
KEY WORDS: foreign exchange; fundamental analysis; psychology; technical analysis

As in all financial markets, a central question in the foreign exchange market is how market participants
and currency traders forecast future market developments. Foreign exchange market participants are
often classified according to two different forecasting approaches, fundamental and chartist/technical
(Frankel and Froot, 1986, 1990). According to this distinction, fundamentalists are market participants
who predict exchange rates by analysing the underlying economic conditions upon which they assume
changes in exchange rates rest. Chartists, in contrast, study only the exchange rate movements themselves
and believe that the history of previous data provides indicators for future exchange rates. Chartists
employ technical analysis, i.e. the analysis of past exchange rate movements to guide forecasts and trading
decisions in the foreign exchange market (Neely, 1997). Chartism includes the visual search for repeated
patterns of data across time.
Recent attempts to formulate an alternative to the efficient markets approach and to provide a more
complete answer as to how expectations in financial markets are formed, differentiate between
arbitrageurs, i.e. rational smart-money investors, and noise traders. Noise is defined as processes leading
to shadow information, i.e. market mechanisms which blur observations of the market (Black, 1986).
Arbitrageurs and noise traders, however, do not transcend the categories of fundamentalists and chartists
described above. Fundamental analysis can be seen as the basis for forecasts and decisions by arbitrageurs
(Menkhoff, 1998). Technical analysis can be seen as an example for noise trading since its strategies build
‘on noise or ‘‘popular models’’ and not on information’ (Shleifer and Summers 1990, p. 24).
The basic distinction between chartists and fundamentalists has served as basis for a demonstration of
the existence of heterogeneous market expectations in the foreign exchange market (Frankel and Froot,
1990). Particularly in the short term, efforts to determine future exchange rates on the basis of economic
‘fundamentals’ have had little success (Harvey, 1996). MacDonald and Taylor (1992) observe that models
which are based on a theory of economic fundamentals alone do not offer sufficient explanations of
short-term exchange rate movements. Also, Frankel and Froot (1990) note that standard macroeconomic

* Correspondence to: Webster University Vienna, Berchtoldg. 1, A-1220 Vienna, Austria. Tel.: +43 1 2699293; fax: + 43 1
269929313; e-mail: oberlech@webster.ac.at

Copyright © 2001 John Wiley & Sons, Ltd.

82 T. OBERLECHNER

analysis, for example, of growth rates or of trade numbers, cannot predict most short-term exchange rate
changes. For example, the value of the dollar in 1984/1985 dramatically departed from what fundamental
expectations alone would suggest. In response to the evidence that fundamentals alone do not suffice to
explain exchange rate behavior, theoretical models that consider the interaction of chartist and
fundamentalist expectations have been developed (e.g. Levin, 1997; Vigfusson, 1997).
Despite the growing awareness of non-fundamental factors in the expectations and decisions of foreign
exchange participants, there is a shortage of empirical data on the use of technical analysis in financial
markets. A small number of previous empirical studies on this topic find that the relative importance of
fundamental and technical forecasting methods in the foreign exchange market depends on the trading
time horizon assumed. Chartism is used mostly for short-term forecasts in the London foreign exchange
market (Allen and Taylor, 1990), a finding confirmed for Hong Kong by Lui and Mole (1998). Menkhoff
(1997) finds that also in the German foreign exchange market chartism is used extensively. Previous
studies have also shown that the relative importance of chartist and fundamental analysis in the market
is subject to a process of change. For example, Frankel and Froot (1990) show that in the period from
1978 to 1988 foreign exchange forecasting services surveyed by Euromoney magazine demonstrate a
notable shift in the kind of forecasting techniques used. Whereas during 1983 –1985 the percentage of
forecasting services employing technical analysis reached a maximum, this percentage then decreased
slightly in the three subsequent years.
This article attempts to extend the results of previous surveys on the importance of chartism and
fundamentalism among foreign exchange traders in London (Taylor and Allen, 1992) and in Hong Kong
(Lui and Mole, 1998) to a new geographic location. This article is the first to survey how foreign exchange
traders form currency forecasts in different European trading locations, i.e. in Frankfurt, London,
Vienna, and Zurich. Since the data for this research was gathered simultaneously in different European
trading locations, a direct analysis of local differences in forecasting methods used in different geographic
locations of the foreign exchange market is possible. To my knowledge, this is also the first study which
determines the importance of different kinds of actors in the market, financial journalists, attribute to
chartism and fundamentalism for the foreign exchange market. Finally, for the first time a more
differentiated typology of foreign exchange traders based on their forecasting styles which takes different
forecasting preferences on several forecasting horizons into account is established. A statistical cluster
analysis of traders’ forecasting approaches on various time horizons goes beyond the simple dichotomy of
fundamental and chartist traders and allows for a description of four distinct forecasting styles across
time, ‘chartist, ascending’, ‘fundamental, ascending’, ‘constant chartist’, and ‘inverse middle’.

1. METHOD

The results presented in this article are based on a questionnaire and an interview survey conducted in the
European foreign exchange trading centers of Frankfurt, London, Vienna and Zurich.1 The data was
collected in spring 1996 from members of three different kinds of organizations in the foreign exchange
market: commercial and investment banks, central banks, and financial news providers.
A total of 600 foreign exchange trader questionnaires were distributed among the foreign exchange
traders of the three largest (in terms of their foreign exchange operations) commercial banks in Austria,
Germany, Switzerland and UK.2 Since London is the capital of global foreign exchange trading, a number
of other commercial and investment banks in the UK were also included. These additional British banks
were included in order to generate more balanced numbers of traders in the comparison of foreign
exchange trading in the UK versus in continental Europe. Of the 600 trader questionnaires distributed to
these banks and to the participating central banks of Austria, Switzerland and UK, 321 were returned,
resulting in a return rate of 54%. Of the responding traders, 18% work in Austria, 12% in Germany, 38%
in Switzerland and 32% in the UK. The sample of participating foreign exchange traders includes 92%
commercial or investment bank traders, 5% central bank traders, and 3% traders who indicated that they
work for a different institution. A large part of the sample consists of senior traders (75%) and a smaller
Copyright © 2001 John Wiley & Sons, Ltd. Int. J. Fin. Econ. 6: 81 – 93 (2001)
 TECHNICAL AND FUNDAMENTAL ANALYSIS IN EUROPE 83

part of junior traders (22%) and foreign exchange trainees (3%). Fifty-one percent of the responding
traders identified themselves as spot traders, 13% as forward traders, 8% as money market traders, 8% as
derivatives traders, and 19% as some combination of the above. The sample consists of 91% male and 9%
female traders.
A total of 200 financial journalist questionnaires were distributed to journalists of the largest financial
news providers operating in Europe.3 Fifty-nine questionnaires were returned, resulting in a return rate of
30%. The sample of participating financial journalists includes 64% wire journalists, 14% financial
television journalists, 19% daily financial news journalists, and 3% journalists working for financial
periodicals. The responding financial journalists work as editors or sub-editors (32%), reporters (56%), or
other financial news journalists (12%). The sample consists of 74% male and 26% female journalists.
In the questionnaires, traders and journalists were asked background information about their
professional and personal status, including the kind of institution worked for, location of the institution,
professional rank, work area, age, years of work experience, and gender. In a later part of the
questionnaire, participants were asked to evaluate the importance they attach to chartist versus technical
analysis on a series of forecasting horizons ranging from intraday to longer than 1 year. The survey also
included questions about the traders’ view on the importance of feelings and of rationality in the foreign
exchange market, and in their own decisions in the foreign exchange market.
In addition to the questionnaires, confidential semi-structured interviews on selected aspects of the
foreign exchange market were conducted with 58 experts from both the trading and the news reporting
side. Forty-two bankers in foreign exchange (treasurers, heads of trading divisions, senior trading
managers and senior traders) and 16 financial journalists (editors, sub-editors, and senior journalists) in
Austria, Germany, Switzerland and UK were interviewed. Interviews were recorded, and were transcribed
verbatim after the interview. In the present article, only selected data from these interviews will be quoted
in the conclusion in order to contextualize the quantitative findings from the questionnaires.
Questionnaires and interviews were designed with the help of foreign exchange experts from the trading
and financial journalism sides. In order to ensure high return rates of the questionnaire, an internal
contact person assisting in the process of questionnaire distribution was assigned to each participating
organization. After the distribution of the questionnaires by the contact person, participating traders and
journalists completed these questionnaires, and sealed their answers in attached envelopes. All participants
were assured that their answers given in the questionnaires and in the interviews were anonymous, and
that the quantitative data would be analysed only on group and not on individual levels. Participants had
the choice to return their questionnaires through their institution’s contact person or by mailing back the
questionnaire directly. In the instructions, participants were asked to fill out the questionnaire
individually.

2. RESULTS

Table 1 lists the average importance ratings of fundamental analysis versus chartist/technical analysis for
foreign exchange traders and for financial journalists on a series of seven forecasting horizons ranging
from intraday to longer than 1 year.
A multivariate two-factorial ANOVA of these ratings shows that both rater type (i.e. foreign exchange
trader or financial journalist; F =22.38, p B 0.001) and forecasting horizon (F= 75.97, pB 0.001) have a
statistically highly significant influence on the perceived importance attached to fundamental analysis and
chartist/technical analysis. The interaction effect between both factors was not significant (F= 0.36,
p=0.91). On six of the seven investigated individual forecasting horizons (intraday, 1 week, 1, 3, 6
months, and 1 year), foreign exchange traders attribute a significantly larger role to chartism than do
financial journalists, as the results of univariate F-tests presented in Table 1 reveal. Only on the longest
forecasting horizon investigated, i.e. on forecasts longer than 1 year, merely a statistically not significant
tendency in this same direction can be observed (F= 2.60, p=0.11).

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84 T. OBERLECHNER

Table 1. Importance attached to chartist/technical versus fundamental analysis over different forecast
horizons by foreign exchange traders and financial journalists

Foreign exchange traders Financial journalists Univariate

(n=282) (n= 49) F-tests

M S.D. M S.D.

Intraday 3.47 2.36 4.53 2.71 8.14**

1 week 3.77 1.90 4.78 2.47 10.54**
1 month 4.40 1.71 5.49 2.07 15.91***
3 months 5.06 1.77 6.29 1.85 19.83***
6 months 5.67 2.01 6.90 1.99 15.52***
1 year 6.35 2.50 7.37 2.32 7.07**
Longer than 1 year 6.79 2.92 7.51 2.75 2.60

Scale: from 0 = pure chartist analysis to 10 = pure fundamental analysis. M, mean, S.D., standard deviation.
Level of significance: ** pB0.01, *** pB0.001.

Figure 1 visualizes that the shorter the forecasting horizon, the more important chartism is both for
traders and for financial journalists. On increasingly longer forecasting horizons, both groups assign
progressively more importance to fundamental analysis. On all forecasting horizons examined, financial
journalists place more emphasis on fundamental analysis than do foreign exchange traders. Accordingly,
the forecasting horizon where fundamental analysis becomes more important than chartist analysis in
predicting exchange rate movements occurs earlier for financial journalists (forecasts of 1 week to 1
month) than for foreign exchange traders (forecasts of 1–3 months).
On rating scales from ‘1= only feelings’ to ‘7= only rationality’, foreign exchange traders and financial
journalists were then asked to indicate the importance of feelings versus rationality in the foreign
exchange market, and in their own decisions in the foreign exchange market. Results of a 2× 2 ANOVA
presented in Table 2 show that foreign exchange traders and financial journalists also differ in their
perceptions of the role of ‘feelings versus rationality’ (F= 47.08, pB 0.001). Univariate F-tests
demonstrate that traders and financial journalists both rate feelings to be slightly more influential than
rationality in the foreign exchange market and that their views of the foreign exchange market do not

Figure 1. Importance attached to chartist/technical versus fundamental analysis on seven forecast horizons by foreign exchange
traders (n = 282) and by financial journalists (n =49).

Copyright © 2001 John Wiley & Sons, Ltd. Int. J. Fin. Econ. 6: 81 – 93 (2001)
 TECHNICAL AND FUNDAMENTAL ANALYSIS IN EUROPE 85

Table 2. Perceived importance of feelings versus rationality in the foreign exchange market and in own foreign
exchange decisions by foreign exchange traders and by financial journalists

Importance of feelings Foreign exchange traders Financial journalists Univariate

versus rationality (n= 314) (n= 57) F-tests

M S.D. M S.D.

In foreign exchange market 3.37 1.02 3.47 1.09 0.53

In own decisions 3.46 1.19 5.02 1.28 81.83***

Scale: from 1 =only feelings to 7 = only rationality. M, mean; S.D., standard deviation.
Level of significance: ***p B0.001.

differ from each other. However, foreign exchange traders and financial journalists hold highly significantly
different views regarding the role of feelings and rationality in their own decisions. Whereas traders consider
feelings to be more influential than rationality in their own trading decisions, financial journalists consider
rationality more important than feelings in their own reporting decisions. In the foreign exchange traders’
views, both of the collective foreign exchange market and of their own decisions, feelings are slightly more
important and there is no difference between these two views (t= − 1.42, p= 0.16). Financial journalists
too consider feelings to be slightly more influential than rationality in the foreign exchange market but show
a highly significant difference between this more ‘emotional’ view of the collective market and a more
‘rational’ view of their individual reporting decisions (t= − 7.42, p B 0.001).
In order to establish individual forecasting approaches independent from specific forecasting horizons,
an overall ‘fundamentalism versus chartism’ forecasting approach was determined for each trader by
computing the mathematical means of the individual ratings given on the various forecasting horizons.
Figure 2 shows the overall distribution of these overall scores. The majority of traders lie somewhere in
the middle of the fundamentalist-chartist continuum, with only 3.1% of traders using an exclusively
fundamental or an exclusively chartist forecasting approach, i.e. with an average forecasting approach 5 1
or ] 9 on the 0– 10 rating scale. Across all forecasting horizons examined, traders usually use a mixture
of both fundamental and chartist methods in their forecasting approach.
A more detailed examination of the single forecasting horizons contributing to the overall result shown
in Figure 2 corroborates this picture: even in intraday forecasts, the shortest forecasting horizon examined,
less than one tenth (6.8%) of traders indicate that they use a purely chartist forecasting method. In
forecasting horizons longer than 1 year, the longest forecasting horizons examined, less than one fourth
of traders (22.6%) indicate that they use a purely fundamental forecasting method.

Figure 2. Overall forecasting approaches of foreign exchange traders (n = 289).

Copyright © 2001 John Wiley & Sons, Ltd. Int. J. Fin. Econ. 6: 81 – 93 (2001)
86 T. OBERLECHNER

Results also provide evidence that among foreign exchange traders the role of chartism has increased
in recent years. Figure 3 compares the present findings for foreign exchange traders in London to the
results of a previous survey conducted among chief foreign exchange dealers in London (Taylor and
Allen, 1992). The comparison indicates that chartism has become more important to the foreign exchange
market in the last decade. Using rating scales from ‘0=pure chartism analysis’ to ‘10= pure fundamental
analysis’, the present sample of London traders judges chartism to be more important on all trading
horizons than do the traders surveyed by Taylor and Allen (1992).
In order to examine the use of different forecasting approaches by different groups of traders, this study
then examined whether there would be a connection between traders’ overall forecasting approach and
their personal and professional background variables. Univariate subgroup analyses of foreign exchange
traders’ overall ‘fundamentalism versus chartism’ forecasting approaches reveal that there are no
significant differences of the forecasting approach used in regard to traders’ age (F= 0.77, p= 0.57),
gender (t=0.00, p =0.99), trader type (spot, forward, money market, and derivatives traders; F= 1.87,
p =0.12), position (trainee, junior trader, and senior trader; F= 0.68, p= 0.51), interbank versus customer
traders (t=1.37, p =0.17), and trading limit (up to US$10 million, US$11 –20 million, US$21 –50 million,
and US$50 million or more; F =1.66, p = 0.18). However, a statistically significant preference can be
found for traders with trading limits of up to US$50 million to use a more chartist forecasting approach
than do traders with trading limits of more than US$51 million (t= 2.05, p B 0.05).
The simultaneous analysis of foreign exchange traders in various European trading locations, i.e. in
Austria, Germany, Switzerland and UK, allows for a comparison of the forecasting approaches used by
traders from different trading sites. A 4× 7 ANOVA design shows that trading location has a highly
significant overall influence on the forecasting approach (F= 2.05, pB 0.01). Table 3 presents the results
of detailed univariate analyses of variance between traders from the four different trading locations. On
the shorter forecasting horizons of intraday, 1 week, 1, and 3 months, trading location has a statistically
significant effect on the forecasting approach used. Only on the longer forecasting horizons of 6 months,
1 year, and longer than 1 year, no such significant influence of the trading location on the forecasting
approach used can be found.
When the subgroup ratings of traders from Frankfurt, London, Vienna, and Zurich listed in Table 3
are compared with each other on separate time horizons from intraday to 1 year, Bonferroni adjusted
subgroup comparisons reveal that traders from London are significantly more fundamental than traders
from Zurich in intraday, 1 week, and 1 month forecasting horizons. On the 3 months forecasting horizon,

Figure 3. Shift towards increased importance of chartism.

Copyright © 2001 John Wiley & Sons, Ltd. Int. J. Fin. Econ. 6: 81 – 93 (2001)
 TECHNICAL AND FUNDAMENTAL ANALYSIS IN EUROPE 87

Table 3. Trading approaches used by traders in Frankfurt, London, Vienna, and Zurich

Frankfurt London (n= 96) Vienna (n =46) Zurich (n= 107) Univariate
(n=30) F-tests

M S.D. M S.D. M S.D. M S.D.

Intraday 3.73 1.82 3.97 2.59 3.37 2.36 2.94 2.17 3.46*
1 week 4.17 1.78 4.18 2.05 3.65 1.89 3.33 1.69 4.07**
1 month 4.80 1.88 4.72 1.83 4.24 1.42 4.05 1.56 3.46*
3 months 5.83 2.12 5.30 1.91 4.67 1.28 4.78 1.60 4.35**
6 months 6.23 2.33 5.78 2.19 5.26 1.41 5.60 1.94 1.58
1 year 6.63 2.65 6.20 2.74 5.93 2.16 6.57 2.37 0.95
Longer than 1 year 6.87 2.92 6.31 3.24 6.76 2.48 7.21 2.76 1.60

Scale: from 0 =pure chartist analysis to 10 = pure fundamental analysis. M, mean; S.D., standard deviation.
Level of significance: * pB0.05, ** pB0.01.

traders from Vienna and traders from Zurich use a significantly more chartist approach than do traders
from Frankfurt.
When traders from larger foreign exchange trading locations (Frankfurt and London) are compared to
traders from smaller trading locations (Vienna and Zurich) in a 2× 7 ANOVA design, the size of the
trading location emerges as highly significant overall influence on forecasting approach (F= 4.73,
pB0.001). Again, univariate F-tests demonstrate that differences between larger and smaller trading
locations exist on the comparatively short forecasting horizons of intraday (F=9.09, p B 0.01), 1 week
(F= 11.26, pB0.01), 1 month (F =9.97, p B 0.01), and 3 months (F= 10.77, pB 0.01), but not on the
comparatively long forecasting horizons of 6 months (F= 2.65, p = 0.10), 1 year (F= 0.07, p= 0.80), and
longer than 1 year (F =3.22, p =0.07). In the shorter forecasting horizons, traders from the larger trading
centers hold a significantly more fundamental approach than do traders from the smaller trading centers.
As described earlier, traders’ overall forecasting approaches were determined by the mean value of their
individual ratings given on the seven time horizons. This approach reduces the information given by an
individual trader on the seven different time-scales (intraday to more than 1 year) to one hypothetical
overall forecasting approach. All information of each of the seven scales enters into the overall forecasting
approach with equal weights. In order to arrive at a more differentiated typology of forecasting styles, a
cluster analysis was conducted. This statistical procedure determines homogenous groups of traders using
similar forecasting profiles across the various time horizons examined. Unlike the computed overall
forecasting approach, a cluster analysis is able to differentiate between traders who arrive at same mean
value of ratings by the use of very different forecasting profiles across the seven forecasting horizons. For
example, a trader’s ‘middle of the road’ overall forecasting approach (i.e. a mean value of 5 on the rating
scales from ‘0=pure chartism analysis’ to ‘10= pure fundamental analysis’) might be based on an equal
mixture of chartist/technical and fundamental forecasting methods on each of the seven individual
forecasting horizons, but also on very chartist forecasts on the shorter forecasting horizons, and on very
fundamental forecasts on the longer horizons.
A hierarchical cluster analysis using Ward’s clustering method and squared Euclidean distance
measures suggested a solution of four relatively homogenous clusters of forecasting patterns. A
non-hierarchical K-means cluster analysis then was applied to partition traders optimally into the four
clusters. Figure 4 gives a picture of the four identified forecasting styles.
The largest cluster (43%) of traders represents the forecasting profile termed ‘chartist, ascending’ which
starts with a very chartist approach to intraday forecasts (1.9 on the scale from 0= pure chartist analysis
to 10=pure fundamental analysis). The longer the forecasting horizon, the more fundamental this
forecasting approach becomes, and traders in this cluster progress to a strongly fundamental forecasting
approach in forecasting horizons longer than 1 year (M= 8.6 on the 0–10 scale). Traders in the
‘fundamental, ascending’ cluster (17%) have a forecasting profile which proceeds parallel to the ‘chartist,

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88 T. OBERLECHNER

Figure 4. Four forecasting styles.

ascending’ profile described above. However, traders in this cluster start with a comparatively more
fundamental (i.e. an only slightly chartist) forecasting approach in intraday forecasts (M = 4.0 on the
0 –10 scale) and, with increasingly longer forecasting horizons, apply a progressively more fundamental
forecasting approach, ending with an almost exclusively fundamental forecasting approach in forecasting
horizons longer than 1 year (M = 9.3 on the 0 –10 scale). Traders in the ‘constant chartist’ cluster (16%)
apply a persistently chartist forecasting approach across all time horizons (M= 2.6 –4.0 on the 0–10
scales). The remaining fourth of responding traders (23%) is termed ‘inverse middle’ since their ratings
remain in the middle of the continuum. This cluster starts with an approach slightly more on the
fundamental side in intraday forecasts (M = 6.4 on the 0–10 scale) and end with a more chartist approach
in long-term forecasts (M=3.6 on the 0 – 10 scale).
Detailed analyses of these four forecasting styles and traders’ personal and professional background
variables show that like the overall chartism versus fundamentalism approaches, these forecasting styles
do also not correlate with traders’ age ( 2 = 20.54, p=0.15), gender ( 2 = 2.21, p= 0.53), trader type
( 2 = 17.56, p=0.13), position ( 2 =3.84, p= 0.70), interbank versus customer traders ( 2 = 1.25,
p= 0.74), and trading limit ( 2 =8.57, p =0.48). However, traders’ forecasting style correlates with
trading location to a highly significant degree ( 2 = 23.87, pB 0.01).
As Table 4 shows, the four identified forecasting styles are not distributed evenly across the examined
trading centers. Relative to the overall sample of responding traders, ‘fundamental, ascending’ traders are

Table 4. Distribution of forecasting styles in four European trading locations

Frankfurt London Vienna Zurich  2 = 23.87

(n=30) (n= 96) (n=46) (n= 107)

n % n % n % n %

Inverse middle 8 26.7 27 28.1 12 26.1 18 16.8 p=0.005

Fundamentalist, ascending 9 30.0 22 22.9 1 2.2 16 15.0
Constant chartist 6 20.0 15 15.6 9 19.6 15 14.0
Chartist, ascending 7 23.3 32 33.3 24 52.2 58 54.2

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 TECHNICAL AND FUNDAMENTAL ANALYSIS IN EUROPE 89

significantly underrepresented in Austria whereas ‘fundamental, ascending’ traders are over-represented in

Germany to statistically significant degree, and in the UK there is a tendency for ‘fundamental, ascending’
traders to be over-represented. In Germany and in the UK, ‘chartist, ascending’ traders are significantly
underrepresented. In Switzerland, the ‘inverse middle’ group of traders is significantly underrepresented.
When traders from the trading locations of Frankfurt and London are compared to traders from the
trading locations of Vienna and Zurich, a highly significant bias in the distribution of trading styles
emerges ( 2 = 17.50, p B0.001). Whereas ‘fundamental, ascending’ traders are over-represented in the
London/Frankfurt group, ‘chartist, ascending’ traders are over-represented in the Zurich/Vienna group.

3. DISCUSSION AND CONCLUSIONS

This study supports previous findings that foreign exchange market participants do not see fundamental
analysis and chartism/technical analysis as mutually exclusive (Taylor and Allen, 1992; Lui and Mole,
1998). Among the foreign exchange traders in the European trading centers of Frankfurt, London,
Vienna, and Zurich, fundamentalists and chartists do not emerge as separate and distinct groups. Rather,
a computation of traders’ overall ‘fundamentalism versus chartism’ approaches results in a bell-shaped
distribution of individual forecasting approaches, with a majority of foreign exchange traders using a
balanced mix of both forecasting techniques. Only a very small minority of foreign exchange traders
demonstrate an exclusively fundamental or exclusively chartist overall forecasting approach. Therefore,
rather than being a second-rate forecasting tool employed by a subgroup of market participants who
either do not possess the relevant fundamental information or do not know how to interpret this
information, chartism seems to be an important forecasting tool employed by a majority of foreign
exchange market participants in addition to the analysis of economic fundamentals. Generally, chartism
is seen as more important on shorter forecasting horizons, whereas on longer forecasting horizons most
market participants put more importance on fundamentals. This finding is consistent with previous survey
studies by Taylor and Allen (1992) in London, by Menkhoff (1997) in Germany, and by Lui and Mole
(1998) in Hong Kong.
The forecasting methods of financial reporters were also examined in this survey because of the
interdependent relationship between trading decision-makers and financial news providers in the foreign
exchange market (Oberlechner and Hocking, 1997). Financial reporters provide trading decision-makers
with news and also analyse possible consequences for market participants. Results show that financial
reporters place more emphasis on fundamental analysis than do foreign exchange traders on all
forecasting horizons investigated. This difference might be explained by the role played in the market by
the media which needs to explain to trading participants reasons for past market events and possible
future trends. This emphasis might lead to forecasting approaches to the market which are based more on
economic fundamentals than are the forecasting approaches of foreign exchange traders. A difference in
task might therefore help explain the divergence between a more academic and intellectual discourse on
the market among journalists and a more action- and result-oriented discourse among traders. This
assumption is supported by the findings on traders’ and financial journalists’ different perceptions of the
role of feelings and of rationality in their own decision-making and in the foreign exchange market.
Foreign exchange traders and financial journalists do not differ in their perception of the market on the
aggregate level but show a marked difference in their view of the role of feelings versus rationality in their
own decisions. In their trading decisions, traders consider feelings to be more influential than rationality,
whereas financial journalists consider rationality more important than feelings in their reporting decisions.
This difference in perception of one’s own decisions may be accounted for by the fact that financial
journalists often need to purposefully find rationality when reporting on and explaining the foreign
exchange market.
Already Allen and Taylor (1990, p. 58) concluded that their findings indicate that there should be
‘ample warning to researchers in financial markets who do not allow for non-fundamental influences’. The
present results underscore this conclusion and may even indicate a continued rise in the importance of

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90 T. OBERLECHNER

non-fundamental factors in the foreign exchange market. However, the present results indicating an
increased role of chartism need to be interpreted with caution. Whereas Taylor and Allen surveyed chief
foreign exchange traders in London, this study included traders on all hierarchical levels. However, the
major part of the London traders included in the present study actually were senior traders (73%), and
only about one fourth of the London traders were not (junior traders 24%, trainees 3%). A more
important limitation of a direct comparison of results is that for the questionnaire used in the present
research, the original wording and question format was merely inferred from Taylor and Allen’s (1992)
reports article and it did not offer respondents an answer category that no particular view was held over
a certain time horizon. The shift towards chartist analysis may therefore not only be based on a real
change of forecasting approaches but also on these methodological differences. However, in a recent
survey Cheung et al. (1999) find that foreign exchange traders in the UK indicate that technical-based
trading has increased as preferred trading method between 1993 and 1998 while the use of
fundamentals-based trading has remained almost unchanged.
One remarkable result of this research comes from a classification of foreign exchange traders according
to their forecasting profiles across the seven forecasting horizons examined. A statistical cluster analysis
results in four relatively homogenous groups of forecasting styles. Two of these groups, ‘chartist,
ascending’ and ‘fundamental, ascending’ both show a typical linear trend from chartism in short
forecasting horizons to fundamental analysis in extended forecasting horizons. At all forecasting horizons,
‘fundamental, ascending’ traders attach more importance to fundamental analysis than do ‘chartist,
ascending’ traders. More than two out of five participating traders (43%) are ‘chartist, ascending’ traders
and less than one of five traders (17%) belongs to the group of ‘fundamental, ascending’ traders. A third
group of traders, termed ‘constant chartist’, applies a clearly more chartist than fundamental approach
across all time horizons examined. This group is nearly as large as the group of ‘fundamental, ascending’
traders (16%). The remaining group of ‘inverse middle’ traders (23%) shows the most surprising
forecasting style. Staying in the middle of the chartism –fundamentalism continuum on all seven
forecasting horizons, these traders move from a forecasting approach more fundamental than chartist in
intraday forecasts to an approach more chartist than fundamental in long-term forecasts.
Local factors have a significant effect on foreign exchange traders’ forecasting approach. This finding
supports that expectations and forecasts in the global market are not formed in a homogenous way.
Market participants from different trading locations use different forecasting approaches to arrive at their
trading decisions. This finding becomes evident both in a comparison of traders’ overall forecasting
approaches (i.e. the means of the ratings on the seven individual forecasting horizons) and in the more
differentiated comparison of traders’ forecasting profiles across the various forecasting horizons
examined.
A comparison of overall forecasting approaches held by traders from Frankfurt, London, Vienna, and
Zurich reveals significant local differences on shorter forecasting horizons from intraday forecasts to
forecasting horizons of 3 months. For example, traders from London are significantly more fundamental
than traders from Zurich in intraday, 1 week, and 1 month forecasts, and on a 3 months forecasting
horizon, traders from Vienna and traders from Zurich use a significantly more chartist approach than do
traders from Frankfurt. A comparison between the larger and smaller trading locations shows that on the
shorter forecasting horizons of up to 3 months, traders from Frankfurt and London hold a significantly
more fundamental overall forecasting approach than do traders from Vienna and Zurich. Reasons for
these differences in forecasting styles between trading centers might be rooted in a variety of factors such
as the centers’ geographic location, their market size, currencies chiefly traded, or differences in traders’
training, and require further examination.
The fact that on the longer forecasting horizons differences in forecasting approaches among different
trading centers could not be established to a statistically significant degree might indicate a real
convergence of forecasting approaches on extended time horizons. However, the majority of surveyed
foreign exchange traders can be assumed to have professional forecasting horizons which are shorter than
some months. It is these professionally relevant shorter forecasting horizons in which significant local
differences in forecasting approaches can be found. The convergence of forecasting approaches on longer

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 TECHNICAL AND FUNDAMENTAL ANALYSIS IN EUROPE 91

horizons might therefore also be explained by traders’ lower exposure with longer forecasting horizons, a
circumstance which might invite the giving of more similar estimates by traders from different trading
locations.
Trading location has a significant effect on forecasting style. This finding, already established by a
comparison of overall forecasting approaches, could further be corroborated by a detailed analysis of
trading styles used in different European trading centers. Most notably, traders from the larger trading
locations of Frankfurt and London make more use of a ‘fundamental, ascending’ forecasting style, and
traders from the smaller trading locations of Vienna and Zurich use more a ‘chartist, ascending’
forecasting style. This finding might be based on a different training of traders or different trading
philosophies by market participants in various trading locations. The finding might however also correlate
with the observation of some interview participants that the large foreign exchange centers (primarily
London but also Frankfurt) are closer to the heart of foreign exchange information than might be Vienna
or Zurich. However, in a recent study on the heterogeneity of foreign exchange forecasters MacDonald
and Marsh (1996) find that there are only little ‘informational asymmetries’ among different countries.
Whatever the explanation for the systematic variations of forecasting styles dominant in different trading
locations may be, findings of the present study suggest that information in the global foreign exchange
market is not processed homogeneously by different parts of the market. They also suggest the
importance of an even more differentiated understanding of different forecasting styles among market
participants, and of the factors underlying these different styles of forming expectations about the market.
Such better understanding might help clarify why currency forecasters hold heterogeneous expectations
and why available information is interpreted differently by different forecasters (Ito, 1990; MacDonald
and Marsh, 1996).
The quantitative findings of this study call recurring attention to the importance of a consideration of
non-fundamental factors affecting forecasts in the foreign exchange market. These findings are supported
by qualitative interview data, where foreign exchange participants discuss chartism repeatedly in order to
underscore the importance of behavioral and psychological factors in the foreign exchange market. One
trading expert defines charts as ‘visual representations of mass psychology’. Traders’ examples of
psychological motives for, and effects of, the use of chartism in the foreign exchange market serve as
illustrations of this mass psychology. Traders often presented psychological reasons as co-determinants of
why they use charts.4 One trading expert related the growing use of charts to the increasing loss of
personal contact with other trading agents. In an effort to make up for the loss of personal contact caused
by the use of electronic trading devices, traders would turn to charts in order to regain a sense of contact
and safety in their trading decisions. Trading participants also reported that they use charts in order to
gain more subjective confidence in the correctness of their judgement.
The common use of chartism by foreign exchange decision-makers in the market may generate
self-reinforcing market patterns. Such reinforcing patterns on a collective level might endow charts with
the power to influence the market by way of a self-fulfilling prophecy. The concept of the self-fulfilling
prophecy was first developed by Merton (1948) who characterized the self-fulfilling prophecy as an
initially incorrect definition of a situation triggering new actions which then verify the initial false
conception. In a recent questionnaire survey of foreign exchange professionals in Germany, Menkhoff
(1997) argues that chartism may be seen as a form of self-fulfilling prophecy. This dynamic can already
be found in Shiller’s empirical investigation of investors’ motives during the dramatic price drops of
crashes in the stock market (Shiller, 1989). Also, Shleifer and Summers (1990) observe that ‘many trading
strategies based on pseudo-signals, noise, and popular models are correlated, leading to aggregate demand
shifts’. In the interviews conducted for the present study, trading experts themselves noticed the
widespread use of charts in the market to effect strongly self-reinforcing patterns. As one trader observed,
a foreign exchange trader may use chart analysis as ‘insurance’ against the large number of other traders
who are known to use charts, thereby providing an even stronger reason for other traders to use charts
themselves. ‘Without the chart system you can’t deal anymore because everybody uses it’, one trader
stated. As a consequence, as another trading expert said, ‘if a hundred people believe in something, these
hundred people will move the market. So they confirm the chart’.

Copyright © 2001 John Wiley & Sons, Ltd. Int. J. Fin. Econ. 6: 81 – 93 (2001)
92 T. OBERLECHNER

‘Economists cannot just rely on assumptions and hypotheses about how speculators and other market
agents may operate in theory, but should examine how they work in practice, by first-hand study of such
markets’, Goodhart (1988, p. 438) declares. The findings of this study shed a differentiated light on the
importance of chartism and of fundamental analysis in different locations of the foreign exchange market.
Not only is chartism widespread in this market and virtually no foreign exchange traders rate themselves
as using fundamental methods exclusively in predicting future exchange rates. Results have also
demonstrated a group of markedly different forecasting styles representing different forecasting patterns
across the various time horizons examined. This emerging typology of forecasting practitioners in
financial markets does not support the assumption that chartist/non-fundamental forecasting methods are
used only by a group of ill-informed market participants who run constant danger of being eliminated by
rational fundamentalists. A further investigation of local and cultural differences affecting forecasts and
decision-making in the foreign exchange market may help shed a more differentiated light on collective
market processes. Such research might also be able to explore whether different forecasting styles bring
along different information gathering strategies, and different styles of processing information when
forming expectations on the market.

ACKNOWLEDGEMENTS

I feel grateful to Sam Hocking for his collaboration and support during an early stage of this research.
I also wish to thank all participating individuals and institutions for supporting the study with their
cooperation. Research funding was provided by the Oesterreichische Nationalbank and Bank Austria. All
remaining errors are my own.

NOTES
1. Together, the countries represented by these trading locations contributed to 42% of the global foreign exchange market activity
in 1995 and in 1998 (Bank for International Settlements, 1995, 1998): Austria 1% (1998, 1%) Germany 5% (5%), Switzerland 6%
(4%) and UK 30% (32%).
2. This number is an estimate. The number of foreign exchange trader questionnaires actually sent to participating banks was
slightly lower. However, after the initial mailing of the questionnaires some banks produced additional copies in order to
distribute the questionnaire to even more of their traders than originally agreed upon.
3. Again, the number of financial journalist questionnaires actually mailed is adjusted since some financial news agencies distributed
additional copies of the questionnaire among their journalists.
4. It is, however, important to point out that chartism itself represents only a quasi-psychology of the foreign exchange market. The
psychology represented by chartist analysis is purely behavioristic in nature and remains on the surface of the observable trading
behavior outcomes of the market. Chartism itself does not examine the underlying reasons and decision-making dynamics of
market participants. It remains on the level of the observable market movement, inferring laws about future trends from typical
shapes of exchange rate patterns.

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