Notes On Belgium: “Erasmus in Retrospect – an Academic and Cultural Experience”

Studying on the Masters in International Business course at Vlekho, Brussels as part of my Erasmus year abroad was highly important to my development both academically, culturally and as a person in general. Through facing new challenges in a foreign country and overcoming them through the assistance of new friends from various cultures I have acquired new perspectives on life and a new found strength.

Nervous about my understanding of French I studied in Belgium because of its English courses, offering me a safety net of learning as I feared not being able to follow courses in French effectively enough. This had unforeseen consequences, as I was obliged to study over half of my courses at masters level. On top of that, seeing as I normally study Economics and Politics at Exeter University the majority of these courses at this Belgian business school were fresh to me. I had a great opportunity to learn courses taking ins Accounting, Finance and Law.

In Exeter, England my courses would be more complex, with time given to wrestle academically in order to reach a more complete view of the world. Vlekho was different, as the demanding number of courses forced me to learn the essential pieces of information quickly, understand and then explain to others. As a result I now have a broader base and am able to act more pragmatically. Crucially, the emulation of the working environment at Vlekho has resulted in me having a greater understanding of what is expected of me when I graduate and I have managed to iron out some of my flaws in a safe learning environment, rather than during my first job after graduation.

One of my greatest challenges at Vlekho was cultural. English education is very individualist compared to my Belgian experience, as in England students work alongside each other, whereas in my Belgian business school they worked together. Previously I had been used to working with groups in societies but there position or rank would engineer a hierarchical framework with which I could effectively work. In Vlekho’s more collective climate my honest intentions to work hard and get the best results produced unexpected responses which often affected my relationships with colleagues. For example, in my first group my desire to raise the collective group grade made me unpopular, as my attitude alienated my team members. As a result even though the group had managed to scrape a reasonable grade as a consequence of me dragging it kicking and screaming I failed as my peer evaluation was negative. I had to examine myself after that incident and although not perfect I feel that I have developed considerably through the advice of teaching staff, friends and personal meditation.

Despite these troubles I had a very enjoyable period studying there. Having been the only English student at the business school for a number of years there was a deal of interest in me, especially as England appears to be one of the countries that the Belgians like the most. The interest and hospitality shown to me makes it very unfortunate that Belgium is ignored by people from Britain when considering where to go or visit.. I'm convinced that next years group of six English students will not get as strong an impression of the country or other cultures compared to me, as I was the only person that most people from Brussels knew from England. As a result, I was their sole point of contact for cultural discussions regarding Britain and people seemed highly interested to talk to me, if only to improve their English from a native speaker!

Although not unique for their appetite the Belgian’s enthusiasm for learning languages and cultures was humbling. Their attitude that everybody should speak over two languages and converse in the other person’s language, if possible was incredible to witness. I think the strongest example of the attitude was witnessing a beggar outside an expensive shopping arcade would listen out for the language and then beg to them in their tongue. I managed to him speak at least four languages to the passers by in just a couple of minutes.

Despite struggling to learn French throughout my life I was determined to learn as much of the language as possible. Consequentially I tried always trying to start in French. However, I would constantly get replies in English as a result of my poor language skills, friendliness or the desire to practice their English with a native speaker. I judged my language development by the increasing frequency and complexity of French development. I predominantly learnt my language from an Italian friend who couldn’t speak any English and no desire to learn it and the fact I was living in a Moroccan and Turkish ghetto (Scaerbeck), where English was not usually understood so well.

People usually had negative opinions towards my area, citing the poverty, high crime levels and intolerance of the Arabs residing there. I didn’t see that, especially as coming from London I had experienced worse. I had also fallen in love with the cultural contrast, as I felt like I was stepping into a completely new city when I made my way home from the centre of town. It was interesting to see the limits of people’s tolerance, as despite being a very international city there had not been enough development in my opinion to accommodate, respect and live alongside people beyond European borders, who I had grown to admire more and more despite the poor economic and social advantages that they are currently experiencing.

I was the first non Belgian or Dutch person to work in my student bar, a Flemish outpost in the ghetto which I was living in. It was an honour to be able to spend so much time with them rather than work in some O’Reiley’s in town serving pints to English tourists. As a result, I improved my understanding of the Flemish culture and language significantly, being able to serve customers speaking in their tongue. Although not being able to converse I feel confident enough to learn Flemish, Dutch or German relatively well in the future, as the many hours of hearing the customers has enabled me to differentiate words and pronounce relatively well, despite not necessarily knowing what was being said.

It was interesting observe cultural traits firsthand. One of then was the seeming confidence of the Flemish as a people, with the northern, Flemish part of the country developing economically and socially successful. On the other hand they felt increasingly disenfranchised with their city (Brussels) becoming increasingly Wallon (the French speaking, south Belgian region), as slower economic growth in the south encouraged migration to the capital city, as well as the majority of immigrants being Francophone, rather than Flemish speaking. I felt that Flemish people didn’t feel like Brussels was their city any longer and more a place that they would commute to from Antwerp or Ghent in order to work. As a result there was the feeling of entrenchment and that they needed to keep bars like theirs Flemish.

A couple of the older regulars held strong opinions on the Moroccans and Turks who ventured in from time to time to drink at our bar. These were often people who merely wanted one or two drinks but who were instantly marked out by some customers or barmen as being suspicious. I ignored such misgivings as their communities had enamoured myself to them. The response from trusting and being courteous to people who others would ignored was positive for me, with these people sharing insights and views of what prejudices they experience and what they like about their home culture. I also made friends with Moroccan neighbours in my building, who would show me all the best places to eat out in Scaerbeck. As a result of not just restricting my cultural exchanges to fellow students or Belgians I have gained tremendously compared to people who erect barriers to discussion. This is a belief that I hope to maintain and I will be able to use personal experiences to shoot down peoples prejudices in the future.

Before I spent my year living in Belgium my viewpoint was restricted to what I had experienced in London and Exeter and from visiting my Irish relatives. I don’t consider my Belgian experience to have ended but ongoing. Being offered a unique opportunity to develop in a new cultural and academic environment has shown me new viewpoints and enable me to develop a better perspective of the world. Academically I had the unique opportunity to work with groups from all around the world on courses I never assumed I would be taking in life. I'm convinced that this experience has done me only good and as given me the confidence to live in Belgium or anywhere in the world that I choose.

This piece was written by Jonathan McHugh in October 2006

AAL test 2

Hofstede’s Analytical Framework

The backbone of Hofstede’s work is that culture mentally programs everybody, both consciously and unconsciously, with society forming peoples values as a result of symbols (words, gestures, pictures, or objects), heroes (people living or not highly prized in a culture) and rituals (unnecessary collective activities carried out for their own sake. Presented in the form of an “Onion” (below), which shows the interrelationship and the steps that form values and how each group is visible (the furthest away from the centre).

From research in the 1970s on cross cultural differences among IBM’s global network of employees Hofstede developed his five dimensions of High vs Low Power Distance, Individualism vs Collectivism, Masculinity vs Feminism, High vs Low Uncertainty and Long vs Short Term orientation in order to help differentiate national characteristics.

High vs Low Power Distance

Country Score Rank

France 68 27 – 29

Belgium Walloon 67 30 – 31

Belgium Flemish 61 39 - 40

Spain 56 45 – 46

Netherlands 38 61

Germany 35 63 – 65

Great Britain 35 63 - 65

The dimension of High vs Low Power Distance has been able to differentiate between countries desire for either highly regarded figures, whether private, public or communal or the ability to question authority and expect more from them.

Individualism vs Collectivism

Country Score Rank

Great Britain 89 3

Netherlands 80 4 – 6

Belgium Flemish 78 8

Belgium Walloon 72 12

France 71 13 – 14

Germany 67 18

Spain 51 30

Individualism vs Collectivism highlights how people and groupings prioritize themselves, with individualist countries favouring personal ambition, whereas collectivists put a greater emphasis on group priority. This enables analysis as to why America is more individualist compared to Japan and offer ways to deal with this.

Masculinity vs Feminity

Country Score Rank

Germany 66 11 – 13

Great Britain 66 11 – 13

Belgian Walloon 60 21

Belgian Flemish 43 47 – 50

France 43 47 – 50

Netherlands 14 72

Masculinity is described as a method of achieving results no matter what the costs, whereas Femininity is the belief in allowing other things to be prioritized in society than material gain. With this tool the book was able to detail why masculine countries such as the USA had such an aggressive form of capitalism and countries such as Sweden prefer a more caring welfare state.

High vs Low Uncertainty

Country Score Rank

Belgian Flemish 97 5

Belgian Walloon 93 9 – 10

France 86 17 -22

Spain 86 17 -22

Germany 65 43

Netherlands 53 53

Great Britain 35 66 -67

High verses Low uncertainty countries responses to events and groups of people were considered to be highly different as a result of differing needs for stability and fear of unknown groups or events. Hofestede’s analysis was used to justify situations such as why it may have been possible for racism in Germany in the 1930s and a low amount of laws in relaxed countries such as Australia.

Short vs Long Term Orientation

Country Score Rank

Netherlands 44 13 -14

France 39 19

Belgium total 38 20 – 21

Germany 31 25 – 27

Great Britain 25 32 – 33

Spain 19 35 – 36

The fifth dimension, Short vs Long Term Orientation describes how and why some cultures have their eye on the future, such as China, whereas countries such as the United States are very much focused on the now. This assumption is used to justify policies ranging from why Americans do not save enough to factors underlining what people desire from relationships.

Extracted and summarised by Jonathan McHugh in July 2006 from:

Cultures and Organizations: Software of the Mind

Geert Hofstede and Gert Jan Hofstede

McGraw-Hill 2005

A Comparison Between UK and Belgian Culture

There are clear differences between Belgian and British attitudes that emerge in all areas of life. For example, the delicacies of Belgium being created through the fusing of least three communities, its historical vulnerability compared to neighbouring countries and its need to trade internationally have all contributed to forming the attitudes of its people, their structures and institutions. As a result, authors such as Hofstead are able to distinguish and attempt to qualify why countries such as Britain are more individualist and relate it to areas, such as Britain’s imperialist past in order to reveal patterns. This report is divided into three areas, politics and economics; education and employment; and society in order to allow for an overview of the countries’ differing cultures and relations to institutions.

Politics and Economics

The complexity of Belgium’s consensus political system helps to balance the needs of both the Wallons and the Flemish. This would be considered to be a more low power distance political system than Britain’s Westminster model, which is based on one party forming the executive. However, this appears to be contrary to Hofstede’s conclusions, either from an underestimation of the effects of institutions (or political institutions) or it gets accommodated by other aspects of culture. The first reason is more likely, as the political framework is designed to balance the needs of Flemish and Wallon interests and disperse pressures which may attempt to divide the country.

Britain is considered the most individualist of all European countries, partly as a result of left wing socialism being drowned out by Thatcherism in the 1980s and an acceptance by the Blair government of the importance of a certain level of inequality in order to encourage economic growth throughout the economy. This continuation under New Labour, a left wing group too frightened by their long absence outside government to aggressively reduce income inequalities, as it would be contrary to what the general population (or at least the swing voters) have become used to under the right wing economics of the 1980s. The reduction in people’s reliance on the state has also reduced the power distance in Britain, as people were forced to support themselves.

In terms of income distribution Belgium is more collective than Britain. Similarly, there is a lot lower difference in wages between the highest and lowest paid workers compared to in England. For example, the highest rates of personal income tax is 65.6% and corporate income tax is 40.2%, where in England it is 60% and 35%.[1]

Belgium’s military police force, although not as extreme as other forces does highlight a more fearful side of Belgian society compared to the moderate British police force. The larger groups of patrolling police officers compared to Britain are also armed, both as a signal of deterrent to would be offenders and to reassure the general public. Judging by the relatively lower levels of crime in Belgium compared to Britain it could be case of departmental capture, whereby the police have argued for more officers than necessary to increase their influence beyond what is economically optimum. However, it could also be the case that Belgian society has a more feminine stance that the benefits of heavy policing outweigh the economic costs of policing (albeit through using one of the more traditionally masculine institutions possible).

However, the Belgian officers seem reasonably tolerant and are out in smaller numbers in larger occasions compared to in Britain. Although it should be mentioned that the ease of use for football fans to take over Bourse to celebrate their victories during the World Cup and the calm of the police officers at the spectacle is probably more to do with Britain’s higher rate of hooliganism than differences abroad.

Britain is undoubtedly more short-term than Belgium politically and economically. The first past the post system encourages governments to fine-tune the economy and policies before elections, even to the detriment of the country in order to get elected. Although not being able to comment in depth, Belgium’s consensus based system should theoretically make it less urgent for governments to ‘fiddle the books’ as much as in Britain.

Although also closely linked with uncertainty avoidance the UK’s reasons to refuse to join the Euro and participate as much in European affairs highlight a disgust at making sacrifices for potential gain in the future. This is not such a problem for Belgium, as the country’s need for consensus as a result of its own fragility culturally and size compared to neighbouring countries makes it more prepared to negotiate and make sacrifices in order to guarantee future security, which can help to explain why Belgium is one of Europe’s most pro EU countries.

Conclusions

Britain and Belgium’s political and economic institutions show clear differences in approaches between the two countries. The most important piece to examine these differences is Britain’s shedding of once core values during the long Conservative government of the seventies created huge repercussions which affected many areas from civic pride, investment decisions favouring short term growth to longer term restructuring and the fear of engagement in European affairs. Belgium’s more relatively stable political system has not experienced such shocks in recent decades, which when combined with its smaller country status internationally helps to explain why more traditional values, such as favouring more cooperation both domestically and internationally and more short-term sacrifices in order to make greater gains in the future.

Education and Employment

The most substantial differences between the studies offered in Exeter and Vlekho is that one is a university and the other is a business school. Whereas Exeter University is more of the traditional academic structure which focuses students’ attentions on a small amount of topics to encourage speciality Vlekho encourages students to know a shallow amount on a larger range of topics to gain a broader experience. As a consequence it is often difficult to make any broader comments about the two countries, although different attitudes do emerge.

In Britain there are most lectures contain hundreds of students and class participation is low (i.e. low power distance). This is compensated by small tutorial groups ranging from sizes usually between 10 and 20 per class which is focused on discussion.

Vlekho has a structure which offers medium sized lectures, usually averaging between 30 and 70 students and no tutorials. Discussion tends to be highly welcomed, although many Belgian students have admitted finding it difficult adjusting to this new structure of teaching at Vlekho. Personally, I have had problems as a result of one Vlekho professor expecting too much a degree of compliance than expected of me both from at my home university and of his peers in Brussels. This might suggest that perhaps the majority or at least some of the students (and some professors) have higher power distances than the revised smaller class size Vlekho educational structure[2] and probably more in line with the British educational structure.

England’s university structure is focused on private study. Courses are graded according to a combination of essays, presentations and exams. Vlekho includes these as well, of course. However, more recently there has been a growing importance on making the education process closer to the environment of the workplace.

One of the developments resulting was that group projects take a higher significance than more individual assignments. Now students’ grades are dependent on the group’s success in projects and not their own personal contribution. This is collectivist thinking even extends to peer evaluation on certain courses which can be the difference between a student getting a respectable grade or failing (no matter his contribution in certain circumstances). In English education is would be highly unorthodox and would be dismissed as blurring how the teacher would understand each individual students understanding of the course.

In both systems there is a different method of encouragement in higher education. In England the system is developed so that individual effort (or laziness), through working on projects alone is more easily distinguished. In Belgium, on the other hand the teacher’s assessment is focused more on cohesion within the group, rather than on individual strengths.

The results structure of Vlekho is different to Exeter Universities in terms of their grade weighting. In England grades are offered as a percentage, with 40% being the lowest pass grade and 70% being the top grade. Over 60% on average is required in order to get an acceptable strong degree level. Vlekho’s more collective grading system results in the pass level being 10 out of 20 (50%) and it being much harder for students to get very high grades. This is because the emphasis, as in the Netherlands is not in isolating and rewarding the more outstanding students but ensuring that all the students complete the minimum. From personal experience I have not come across any students with aspirations to getting high grades, as most people are more concerned with merely passing.

Vlekho’s higher minimum pass rate than in Britain could highlight the need to weed out the less capable students, such as making it hard to pass accounting exams to ensure that accountants are highly accomplished rather than knowledgeable in their profession.

English universities tend to be more flexible than Vlekho’s approach, which although it has declined in the last few decades permits more free developmental time than Belgian higher education. This is clearly differentiated by the existence of a large Union structure in English universities, which supports the creation of societies. In Vlekho there really only exist Pro Gaudio and Cleopatra, which are effectively drinking societies.

The Belgian system of making students sit more modules and takes multiple styles of evaluation (such as exams, presentations, orals, etc..) should ensure that the students results are less prone to error and bad luck than English exams, which rely on big exams to determine results (and even future careers).

However, it has to be noted that societies and groupings do exist but outside the institutions of education, serving the needs of society rather than the bubble of university. However, it is difficult from experience to qualify the differences in these post education differences.

Belgium invests a considerable amount more per student than in Britain in education, as it is considered that the benefits both in terms of future tax revenue as a result of a more productive workforce and net society gains as a result of a more conscientious population.

From my experience working at Den Bisnis I have noticed differences from various forms of employment (both skilled and unskilled) to English employment. One of the most noticeable was the reward structure. Most bar professions involve tips. When I worked in a coffee shop it was pooled every month, as the automation involved meant that one customer would be served by at least one employee. In Den Bisnis there is only one barnman serving, normally for half the day. Despite this tips are pooled across all employees for the year, so that it meant no difference how hardworking an employee is or popular he is with the customers he will still receive the same return as the rest. Not only this but the money is actually spent on one day out, where all the barmen go drinking for the whole day. This provision, although unlikely to be representative of Belgium in general and all forms of work does highlight subtle cultural differences in the way table service operates between countries.

Belgian employees tend to be more professional than in Britain. Although not directly celebrated a higher minimum is expected, which appears to filter through most areas of society, even down to the kebab shop seller, who makes the effort in most cases to maintain a level of care. This is partly as a result of pride in their output, as a consequence of Belgium’s trading history and a greater sense of responsibility.

Unfortunately in Britain effort is looked down upon, almost as a form of cheating. The professional slacker is becoming more of a major problem in companies, with an increasing number of employees preferring to cheat than contribute to their system, a negative effect of the individualist and masculine business environment.

On the other hand, British customer service is of a lot higher standard, as the Belgian customer-employee relationship is because of its falsity and having been less exposed to ideas of American human resources and marketing.

In the workplace, despite the English habit of people hiding their emotions through degrees of sarcasm and protocol there is a greater degree of criticism of peers and authority figures than in Belgium. Criticism does exist in Belgium but does not tend to get told directly to the people involved but rather as a complaint to confidents, as a result of a lower power distance existing within the workplace.

Conclusion

The main between British and Belgian education and working practices is the level of individualism which affects the assessment of people and consequentially furthers patterns of behaviour through rewards or punishment. For instance, as a business school Vlekho has been keen to adopt many US and UK originated ideas. Despite this there are hidden characteristics which exist to encourage more conscientious practices. In the UK this is felt to be less important, as there are felt to be greater benefits from encouraging people to compete more against each other. One concern for Britain is that the emphasis on success through individual and masculine methods is that its incentives often encourage underperformance and cost cutting, which helps to create negative effects in the workplace and society in general.

Society

In Britain there is a lot less respect for strangers and family ties than in Belgium. These low power distance characteristics can be seen in many forms, such as youths hanging around street corners intimidating passers-by. This is regarded as part of the ‘Decline In British Values’ that has been deteriorating, partly as a result of the rise of individualism under the Thatcher government. Although rough areas are mentioned by Belgians there tends to not be any problems on the streets, although I do hear personal stories from female friends of mine who have experienced problems with Arab youths causing them grief. However, I haven’t been witness firsthand enough to comment sufficiently how large this problem is and it would certainly not be any worse than in England.

Belgium’s (especially Brussel’s) influx of Turkish and Moroccan immigrants are posing newer problems, as they are less willing than previous southern European migrants to assimilate into Belgian culture, as well as increased cultural differences to bridge. As a consequence there is a greater sense of caution towards them because of a fear of the unknown. This has happened in England (especially London) previously and although it is difficult to determine which created a greater degree of uncertainty it has to be mentioned that it does occr in both countries but that England is at a different stage.

A clear distinction can be made by different controversial issues that have been settled and considered the norm in some countries and others which are still shocked by them. Issues on drugs, sexuality and pluralism appear almost on a sliding scale, with the more feminine Netherlands accepting many issues, Belgium tolerating some through non policing and Britain tending to assume that society’s fabric will unwind if certain issues are treated softly.

In Belgium I find it amusing how all Belgian’s seem to return every weekend without fail to see their parents. British students tend to embrace their freedoms a lot more, seeing it as a further step towards independence. It appears that Belgian’s links towards their families are stronger and that British students tend to prefer to cut some of their collective bonds to have more freedom and discover newer sides to themselves at university.

One of the most interesting differences between British cities and Brussels is the relative lack of advertising boards. In Brussels these are then predominantly for cultural events, highlighting a more feminine outlook, as the cultural prospects of the street are favoured over marginal profitability. However, a large billboard recently constructed by Botanique by a British advertising company may be heralding a shift in brand advertising in Belgium. Normally, the majority of company advertising has been through sponsoring cultural events, so as to be included in on street posters.

Belgian architectural rules give preference to designers ideas, preventing other designers being able to replicate features in other buildings. As a result there is only one street in Brussels where the houses are the same and that is only on one side of the street. As a consequence of a lack of uniformity there is greater architectural spontaneity of design on a single street (albeit quite subtly), in terms of size, materials and architectural features, which would highlight an individualist mindset. However, on the other hand this is also coupled with both architects and town planners’ desires to incorporate future buildings in line with existing structures, especially in height and proportion in order to create more of a continuous theme, even in cases where the materials and periods are different. The result is a city where the buildings, although reflecting individual preferences and budgets is still restrained by the collectivist notions of previous styles and the local neighbourhood.

Brussels public works such as metros or government buildings tend to reflect their attitude that it is easier to plan and prepare for future demands and capacity rather than constantly having to deal with expedients. An interesting comparison would be comparing the size of the metro stations in Brussels to London’s Underground. In the Belgian case the stations are built so that capacity will not need to be enlarged in order to deal with future population sizes. In London all stations tend to be overcrowded and usually over capacity, with stations often being closed temporarily, as it would be unsafe to allow more people inside. Although Brussels’ transport is overcrowded it is merely a case of the pricing structures with the companies running them and not providing enough carriages platforms could easily accommodate twice the amount of carriages than currently offered.

Conclusion

Belgian society’s open-mindedness and collectivism reverberates especially in Brussels, reflected in the diverse range of communities, beliefs and architectural ideas that exist. Belgium’s beliefs towards inclusively is being challenged by minorities more prepared to be distinct than previous generations. British society, which had experienced similar immigration has overcome most of these questions over time, partly as an unmentioned debt to these as a result of imperial aggression in the past and a homogenising idea of what it is to be British. This final reason although speeding up the process of integration results in the island paranoia of immigrants intentions never disappearing, even with descendents eventually excluding future immigrants to a small extent.

General Conclusions

In terms of marketing potential the variations in culture as a result of subtle characteristics of values, rituals, heroes and symbols between the UK and Belgium require slightly different approaches to a company or organisation promoting itself. For example, a commercial which emphasises more individualist values, such as the go getting male who gets the girl over his mates at the nightclub because of some accessory would be more successful at tapping into UK instincts more than in Belgium. Similarly, an advert showing the potential for play as a result of an accessory within a group would be more successful to Belgian audiences. However, this observations still need to be taken with a pinch of salt, as Belgium and UK differences are fairly close to each other on a global scale, as European characteristics will be much close compared to characteristics in other countries. International comparisons between Belgium and Japan would reveal Belgian’s to be more independent, for example. On the other hand, there are clear differences between the UK and Belgium, enough to benefit any marketers who want to gain the most exposure for their products.

This report was written by Jonathan McHugh in August 2006

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[1] OECD in Figures Statistics on the Member Countries, 2002.

[2] Although I suspect in the case of my professor it is more a comedown from previously working high up in business, where he was the absolute authority.

An Introduction to Technical Analysis

1. General Overview

Portfolio Management is the process of choosing investments that are suitable for an account, bearing in mind an identified objective for the account but operating within defined risk parameters. A Portfolio manager should design a portfolio that will achieve the desired rate of return while keeping the risk within an acceptable level. There are two main types of methods used to analyse and predict the performance of stock. These types fall into two categories: Fundamental Analysis and Technical Analysis. In this paper we will focus solely on Technical Analysis.

Technical Analysis is the forecasting of future stock movements by using numerical series generated by market activity to look for peaks, bottoms, trends, patterns and other factors affecting a stock's price movement in order to make buy/sell/HOLD decisions. It can be applied to stocks, indices, commodities, futures or any tradable instrument for which price is influenced by the forces of supply and demand. In this case, the prices refer to combinations of the open, high, low or close for a given security in a specific time frame.

Technical Analysis does not result in absolute predictions about the future, but it can help investors anticipate what is "likely" to happen to prices over time. It is primarily, though not solely conducted by studying charts that show the price movement of a stock over time. There are hundreds of different patterns and indicators used by investors, this paper will close up on some of them.

example of bar chart

Technical analysis does not mean to analyse the reasons why there has been a price movement in a certain stock. Instead, it focuses in whether it has moved in a particular direction and tries to find a chart pattern that can be useful for forecasting. Followers of this method believe that you can take advantage of the market and make profit by what they call “trend following”, meaning that if the price rises, they expect it to continue rising and vice versa.

Once a trend is identified, it is believed that it will continue until something happens to change the trend, and until this change occurs, price levels are predictable.

3. Basis of Technical Analysis[1]
The Dow Theory, which is a theory based on the writings of the co-founder and editor of Dow Jones, Charles Dow, laid the foundations of what later became modern technical analysis.

Ralph Nelson Elliott based his studies on the Dow Theory and in the late 1920s came up with The Elliott Wave principle. He discovered that stock markets do not behave in a chaotic manner, but that markets move in repetitive cycles, which reflect the actions and emotions of humans caused by exterior influences or mass psychology. The patterns that Elliott discovered are built in the same way. An impulsive wave, which goes with the main trend, always shows five waves in its pattern. On a smaller scale, within each of the impulsive waves of the before mentioned impulse, again five waves will be found. In this smaller pattern, the same pattern repeats itself ad infinitum.

Example of an impulsive wave in an uptrend

Source: “Elliott Wave Theory”, Prognosis software development, p. 5

Studying the patterns is very important in order to apply the Elliott Wave Principle correctly. The pattern of the market action, if correctly determined, not only tells an investor to what price levels the market will rise or decline, but also in which way (or pattern) this will happen. When an investor is able to recognize the patterns, and apply these patterns correctly, he can trade the Elliott Wave Principle. However this is not easy to accomplish due to the fact that the theory itself is very complicated as it consists of many patterns, which incorporate Fibonacci ratios. That is also a reason why explaining it in detail cannot become a part of this essay.

In the 70s, the Wave Principle gained popularity through the work of Frost and Prechter. At present there can be found a lot of software on the market which uses different engines to perform wave count according to Elliott Wave Theory, or a neo/modern version of it.

Obviously the Elliott Wave Principle can get very complex – especially in corrective waves – since the person applying it will have to look for patterns, which contain patterns, which contain patterns etc. etc. The problem is that sometimes several alternative counts can be found pointing not in the same direction. That is why the key to forecasting markets with Elliott Wave Theory lies in determining the probabilities of alternative scenarios, assessing their probabilities by studying their compliance with the permitted internal wave structure, and supporting the analysis with other indicators.

4. Trading the Elliott Wave (example)
An investor willing to use Elliott Wave Theory should first of all determine which patterns and alternative wave counts give the best trading opportunities, such as when several alternatives all produce a price movement in the same direction. Afterwards we should determine objective entry points based on patterns (a point at which we are sure the pattern is valid) as well as objective exit points, also based on patterns. You should for example exit a trade when a price movement makes your preferred wave count invalid or when a price movement reaches its target.

Suppose the market has experienced a big sell off. From the low it starts to rise. Wave 1 (or A) and waves 2 (or B) have been completed and the market starts to rise again. The first picture shows two scenarios possible, either an impulse (1,2,3) or an A, B, C correction.

Forming of a pattern

Source: “Elliott Wave Theory”, Prognosis software development, p.39

The pattern can be an impulse only if the 4th wave does not overlap the first, a level indicated by the horizontal “stop” line. If it does we might be dealing with a correction. This correction will be confirmed when the price drops under the origin of wave C, which is the end of wave B. Provided it doesn’t drop under the “confirmation” line, it cannot be assumed that the market will go down.

Scenario number one Scenario number two

Source: “Elliott Wave Theory”, Prognosis software development, p.39

In the first scenario we might want the pattern to confirm itself therefore we might want to wait for the price to come near the stop line and enter the trade, which is quite hazardous, as it would require exiting it with a loss when it turns out that we are in a correction. We could also wait for the trend to turn. However, we then lose part of the move, which is part of the profit. The best way to deal with this problem is to combine the wave count with other indicators.

When analysing the second scenario it becomes obvious at a certain point in time that we are dealing with a downtrend. That situation would require from us to wait for the confirmation and during that time we lose part of the profit just as in the situation described above.

After entering the trade we will know the exit point (stop line) and the take profit point, meaning that we know how much we can lose (risk, amount of money lost by the time we can clearly state that we were on the wrong side of the market) and how much we can gain (return, amount of money that we receive when the prices hit the take-profit level). That makes exactly this type of analysis very useful in portfolio management, as we receive a tool that is able to objectively measure risk/return ratio on the basis of which we can evaluate our next move. After each trading day we can perform an update of our positions not only on a guess basis, but taking into account the before mentioned risk/return ratio and the changes in prices. What is more, advanced forms of Fibonacci ratios enable us to calculate time clusters, meaning that we can expect how long will it take for a pattern to form and when can we expect a given trend to come to an end. We should not, however, rely on risk that is small. It means in practice, that we might be easily wiped of the market in a short term opposite movement, as our stop will be close to the entry point. Also, a small number in the nominator would dilute the risk/reward ratio.

5. Indicators[2]
In general, an indicator is a result of mathematical calculation (formula), based on prices and/or volume. The received figures are important because they act as an alert to study price action a little more closely. Furthermore, they can be used to confirm other technical analysis tools and finally, indicators can be used to predict the direction of future prices. Unfortunately there are hundreds of indicators. Which should we choose then? If we have a closer look at the indicators, it could be said that they can be divided into two main categories; moving averages and oscillators. These two measurements can be used in several ways as they might be: presenting strength of a trend, support and resistance levels; divergences that occur between indicators and price, suggesting a possible future trend reversal; confirming trend reversals.

Moving averages are one of the oldest and most popular technical analysis tools. A moving average is the average price of a security at a given time. When calculating a moving average, you specify the time span to calculate the average price (e.g., 25 days). If the security's price is above its moving average, it means that investor's current expectations (i.e., the current price) are higher than their average expectations over the last 25 days, and that investors are becoming increasingly bullish on the security. Conversely, if today's price is below its moving average, it shows that current expectations are below average expectations over the last 25 days.

The classic interpretation of a moving average is to use it to observe changes in prices. Investors typically buy when a security's price rises above its moving average and sell when the price falls below its moving average. However the disadvantage is that you will always buy and sell late. If the trend doesn't last for a significant period of time, typically twice the length of the moving average, you'll lose money. That is why MACD gained more importance.

The MACD ("Moving Average Convergence/Divergence") is a trend following momentum indicator that shows the relationship between two moving averages of prices. The MACD is the difference between a 26-day and 12-day exponential moving average. A 9-day exponential moving average, called the "signal" (or "trigger") line, is plotted on top of the MACD to show buy/sell opportunities. The basic MACD trading rule is to sell when the MACD falls below its signal line. Similarly, a buy signal occurs when the MACD rises above its signal line. It is also popular to buy/sell when the MACD goes above/below zero. The MACD is also useful as an overbought/oversold indicator. When the shorter moving average pulls away dramatically from the longer moving average (i.e., the MACD rises), it is likely that the security price is overextending and will soon return to more realistic levels. On the other hand, however, when shorter moving averages reaches high levels we can be almost sure that the prices, after declining slightly, shall almost come back to their previous levels in order to establish a divergence. This is a strong indication that an end to the current trend may be near. A bearish divergence occurs when the MACD is making new lows while prices fail to reach new lows. A bullish divergence occurs when the MACD is making new highs while prices fail to reach new highs.

Another indicator that offers a wide range of trading signals is RSI, which is a price-following oscillator that ranges between 0 and 100. A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal. When the RSI then turns down and falls below its most recent trough, it is said to have completed a "failure swing." The failure swing is considered a confirmation of the impending reversal. Apart from that the RSI usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart. It often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart. The same applies for support and resistance levels, Gann fans.

The Guru Index

In the portfolio management sense Gurus are people who write for newsletters and publications on matters of business and the economy. The Guru Index is a measure of their levels of optimism (expecting a bull run) or pessimism (expecting a bear run). This is then noted as a percentage of bullish / bearish sentiment.

Below a table details the ratio and frequencies of bearish sentiment in the market and the performance of the Dow Industrial Index 6 months later.

The data seems to confirm the logic of the Rule of Contrary Opinion, a belief that there are gains to go against popular opinion, as often people work each other into frenzy when there is nothing quantifiable to back up such enthusiasm. This is because the data shows that experts’ strong opinions tend to correlate inversely with stock market movements. For example, high bullish opinions of experts normally correlate with a decrease in the marketplace, and high bearish opinion correlates with a large increase in the marketplace.

The Rydex Ratios
Among the Rydex Mutual portfolio of funds there exists the Rydex Nova Fund and the Rydex Ursa Fund. The Nova Fund is leveraged to cover 150% of the S&P 500 market, i.e. earn larger or smaller losses than possible with simple investing. On the other hand, the Ursa Fund works in the opposite way, being an inverse to the markets movements.

The amount invested for each of these funds is then measured and turned into a ratio, with the bearish Ursa fund being divided in value by the bullish Nova funds value for a ratio.

The diagram below highlights a strong correlation, with similar movements in the data to the movements of the Ursa / Nova indexes.

Similarly, the theory of Contrary Opinion highlights how extremes in opinion, such as Ursa : Nova ratios being higher than 3 preceding an increase in the S & P, or a ratio below 0.3 signalling a decrease in the S & P 500. However. These funds are recent and as a result there has not been enough data to fully substantiate how useful an indicator the Rydex Ratio is.

Even if we are happy with the above mentioned indicators, or with any other taken from a long list of trading tools there is always a way to make it even better. All of this can be accomplished with neural networks. We can take a number of different length RSI oscillators, pass them to the neural network, and ask it to use those inputs to improve our original RSI oscillator. In that way we would receive trading signals at least 2-3 days earlier, which is a big advantage. What is more we can combine several indicators when performing the calculations, which can also give us interesting results in a form of an indicator that incorporates several others and performs in a completely new way.

6. Trading strategy

All in all technical analysis is a broad area of study, offering many trading methods. That is why some of them will always be contrary towards each other, giving opposite signals. Therefore each investor should establish his trading strategy. In order to stay on the right side of the market we should follow the Elliott Wave Theory, which may be supported by moving averages. That will enable us to “trade with the trend”, manage our portfolio most efficiently with risk/return ratio. However for timing the trade we should take into account other indicators, most preferably few of them, augmented by neural networks. They would be helpful in entering and exiting a trade in the most proper moment.

Conclusion

Technical analysis is the attempt to understand the seemingly random stock market and enable investors to make better informed decisions about how to speculate their money effectively. However, it has to be remembered that there will never be a golden rule to understanding the stock market. Tools such as the Elliot wave, although highly useful at forming a more quantifiable approach to investing have their limitations. Like all models, the Elliot wave is built upon certain inferences and assumptions. Sometimes models put too much or too little emphasis on particular information. Often tools become less useful over time, as the factors explaining the tool’s reliability become outdated and less important to business and the economy. Unfortunately, it (just as every other form of analysis) has its limitations, as the stock markets movements are too complex for one set of guidelines.

This does not mean that they should never be used but merely employed in moderation. The use of a carefully chosen group of technical tools to complement your knowledge is a sensible option. However, overburdening yourself with models, no matter what their potential use is can be dangerous and highly misleading. For example, just as somebody having a studios worth of musical equipment does not guarantee any musical chart success (even though it may help) an investor is not necessarily going to become wealthy by hoarding stock market models. Ultimately, technical tools are indispensable for an investor keen to anticipate the correct time to invest and the correct time to sell. It is just necessary to remember that a balance needs to be maintained between a collection of tools correctly tested and understood in terms of their benefits and limits of analysis and an investor’s gut feeling, which being formed from life experience is probably the most important tool an investor has.

Report written by Marisa Ahuja, Cristina Obando, Rafal Szymczak, Jonathan McHugh and Audrey Mailott in April 2006

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[1] “Elliott Wave Theory”, Prognosis software development, www.prognosis.nl

„Elliott Wave Theory”, Frost, Prechter

[2] “Technical Analysis from A to Z”, Achelis

„Technical Analysis Explained”, Pring

“Technical Analysis of the Financial Markets”, Murphy