Trading
Exploring the link between behavioural finance and technical analysis
Published by Gbaf News
Posted on October 7, 2011
5 min readLast updated: January 22, 2026
Global Banking and Finance Review
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Published by Gbaf News
Posted on October 7, 2011
5 min readLast updated: January 22, 2026
by Bijoy Kar, CFA
Technical Strategist at MIG BANK – a leading Swiss FX and CFDs online trading provider
The historical starting point for security analysis.
Historically strategists and asset allocation specialists have used macro economics/fundamental analysis, together with the concept of modern portfolio theory (MPT) as their starting point for security analysis.
Initially projections/assumptions are made for major macro statistics like GDP growth, unemployment, inflation etc. These projections are then used to make assumptions about the likely movement in government bond markets and then all other markets that are affected by the repo rate (base rate)
(see figure 1).
To assess the robustness of any form of analysis we need to take a closer look at any assumptions that are made. In the case of Modern Portfolio Theory, we make some major assumptions about the behaviour of the individuals that operate within financial markets. In particular we assume the following:
There are other assumptions but they will not be covered at this point.
The weakness of assumptions in MPT / The reality of trading.
The following points need to be considered when questioning the above assumptions:
Purely using rational thought and fundamental analysis is unlikely to lead to success, which is why so many computer models have become dominant in the world of trading.
The best way to determine if the above assumptions are close to reality is simply to look at the evidence of investor behaviour from price history.
All of the above economic releases are likely to bias even a rational investor to trade from the long side, but following all of these releases Sterling was bought, forcing EUR/GBP lower. It is clear that fundamental analysis would not have been a great deal of help at this point. Understanding human behaviour would have helped. However, fundamental analysis should not be dismissed. Instead the market reaction to fundamental releases can potentially be used to assist the astute investor in trying to determine the general positioning of the market.
by Bijoy Kar, CFA
Technical Strategist at MIG BANK – a leading Swiss FX and CFDs online trading provider
The historical starting point for security analysis.
Historically strategists and asset allocation specialists have used macro economics/fundamental analysis, together with the concept of modern portfolio theory (MPT) as their starting point for security analysis.
Initially projections/assumptions are made for major macro statistics like GDP growth, unemployment, inflation etc. These projections are then used to make assumptions about the likely movement in government bond markets and then all other markets that are affected by the repo rate (base rate)
(see figure 1).
To assess the robustness of any form of analysis we need to take a closer look at any assumptions that are made. In the case of Modern Portfolio Theory, we make some major assumptions about the behaviour of the individuals that operate within financial markets. In particular we assume the following:
There are other assumptions but they will not be covered at this point.
The weakness of assumptions in MPT / The reality of trading.
The following points need to be considered when questioning the above assumptions:
Purely using rational thought and fundamental analysis is unlikely to lead to success, which is why so many computer models have become dominant in the world of trading.
The best way to determine if the above assumptions are close to reality is simply to look at the evidence of investor behaviour from price history.
All of the above economic releases are likely to bias even a rational investor to trade from the long side, but following all of these releases Sterling was bought, forcing EUR/GBP lower. It is clear that fundamental analysis would not have been a great deal of help at this point. Understanding human behaviour would have helped. However, fundamental analysis should not be dismissed. Instead the market reaction to fundamental releases can potentially be used to assist the astute investor in trying to determine the general positioning of the market.
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