Every forex (foreign exchange) transaction involved the transfer of funds between two nations and that means that it also involves the payment and settlement systems of the two countries concerned in the transaction. For this reason national payment and settlement systems play a key role in the day to day operations of the forex market.
Today there are a wide variety of payment systems which are legally acceptable within the United States and payments can be made for example in cash, by check, using an automated clearing house or using an electronic funds transfer.
In terms of the sheer number of transactions the vast majority of payments in the United States today are made in cash or by check, however, in terms of value, the greatest amount of money is paid by electronic funds transfer. For this reason the electronic funds transfer system is a key component of the Unites States payment and settlement system and it is this system which is used to make inter-bank transfers between dealers in the forex market.
There are two main electronic funds transfer systems operating in the United States today. The first is the Clearing House Inter-bank Payments System (CHIPS) which is a private system operated by the New York Clearing House and the second is a system operated by the Federal Reserve Bank and known as Fedwire.
Using Fedwire a regional Federal Reserve Bank debits the account of the sending bank and credits the account of the receiving bank so that the transfer is effectively immediate and this is often referred to as a RTGS (real time gross settlement) system. By contrast individual transactions are not settled during the course of the trading day using CHIPS but are settled at the close of each day's business as a net settlement for each individual CHIPS account holder. Final settlement of CHIPS obligations is made using Fedwire.
Other countries operate systems similar to those in the United States. In the United Kingdom for example settlement is made through the Clearing House Association Payments System (CHAPS) with settlement being made through the Bank of England, while in the European Community a system linking the banks of member states and known as Target is used to settle transactions involving the Euro.
The United States settlement system is particularly important in the world of forex trading because the majority of global foreign exchange transactions involve the US dollar with daily settlements running into trillions of dollars. Indeed, the bulk of the transactions processed through CHIPS every day are foreign exchange transaction settlements.
Although modern technology has done much to transform foreign exchange trading one element which still concerns many people is that of 'settlement risk'. In other words, the risk that you will pay out the currency you are selling but not receive the currency you are buying. Considerable efforts have been made in recent years to reduce settlement risk in the foreign exchange markets and today the vast majority of forex traders would consider this risk to be minimal.
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Monday, September 1, 2008
The Complex Nature Of Exchange Rates In Forex Trading
An exchange rate is simply a score for one currency against another and represents the number of units of one currency that need to be exchanged for a single unit of another currency. The exchange rate is thus the price of one currency against another and, given the number of world currencies today, within the US alone there are literally dozens of exchange rates. Now that seems simple enough but, unfortunately, it is not quite that easy.
Quite apart from these simple exchange rates, which are sometimes referred to as 'spot' rates, there are also a whole range of 'trade weighted' or 'effective' rates which show the movement of one currency against an average of several other currencies. There are also exchange rates which are used in markets such as the forwards markets in which delivery dates are set at some point in the future, rather than at the time of the initial transaction. In other words, there is no such thing as an exchange rate, but are in fact a series of different exchange rates depending upon the nature of the transaction.
The foreign exchange market is driven largely by supply and demand and the exchange rate between any two currencies at any moment in time is influenced substantially by the interaction of the various players in the market. In a few cases currencies are still fixed, or the exchange rate is set by the monetary authorities, and when this is the case the country's central bank will normally intervene if required and either buy or sell the currency to keep its exchange rate within a narrow and defined band. In the vast majority of cases however, and certainly in the case of the US, currencies are allowed to float and central banks do not normally, and certainly not routinely, intervene to support their currency. Accordingly, the exchange rate for a particular currency against other currencies is determined by players, large and small, who are buying and selling the currency at any particular moment in time.
The mix of participants in the market is important and will affect different currencies to varying degrees. Some buyers and sellers deal in the market purely in support of international trade and are operating in the 'goods' market buying and selling currency to pay for merchandise being traded across national borders. Other dealers are buying and selling currencies in support of 'portfolio investment' and are trading in bonds, stocks and other financial instruments across national borders. Yet another group of currency traders are operating in the 'money' market and are trading short term debt across international borders.
As if this were not complicated enough, this mix of traders whether they are paying for imports, investing, speculating, hedging, arbitraging or simply seeking to influence exchange rates are also focusing their attention of a variety of different timeframes in their trading which will range from a matter of minutes to several years.
Against this background it is no wonder than predicting exchange rates is a complex business. Doing so however is vitally important since exchange rates influence the behavior of all of the participants in the market and, in today's open market, also influence interest rates, consumer prices, economic growth, investment decision and so much else. It is for this reason that the forex market plays such a critical role in determining exchange rates.
Quite apart from these simple exchange rates, which are sometimes referred to as 'spot' rates, there are also a whole range of 'trade weighted' or 'effective' rates which show the movement of one currency against an average of several other currencies. There are also exchange rates which are used in markets such as the forwards markets in which delivery dates are set at some point in the future, rather than at the time of the initial transaction. In other words, there is no such thing as an exchange rate, but are in fact a series of different exchange rates depending upon the nature of the transaction.
The foreign exchange market is driven largely by supply and demand and the exchange rate between any two currencies at any moment in time is influenced substantially by the interaction of the various players in the market. In a few cases currencies are still fixed, or the exchange rate is set by the monetary authorities, and when this is the case the country's central bank will normally intervene if required and either buy or sell the currency to keep its exchange rate within a narrow and defined band. In the vast majority of cases however, and certainly in the case of the US, currencies are allowed to float and central banks do not normally, and certainly not routinely, intervene to support their currency. Accordingly, the exchange rate for a particular currency against other currencies is determined by players, large and small, who are buying and selling the currency at any particular moment in time.
The mix of participants in the market is important and will affect different currencies to varying degrees. Some buyers and sellers deal in the market purely in support of international trade and are operating in the 'goods' market buying and selling currency to pay for merchandise being traded across national borders. Other dealers are buying and selling currencies in support of 'portfolio investment' and are trading in bonds, stocks and other financial instruments across national borders. Yet another group of currency traders are operating in the 'money' market and are trading short term debt across international borders.
As if this were not complicated enough, this mix of traders whether they are paying for imports, investing, speculating, hedging, arbitraging or simply seeking to influence exchange rates are also focusing their attention of a variety of different timeframes in their trading which will range from a matter of minutes to several years.
Against this background it is no wonder than predicting exchange rates is a complex business. Doing so however is vitally important since exchange rates influence the behavior of all of the participants in the market and, in today's open market, also influence interest rates, consumer prices, economic growth, investment decision and so much else. It is for this reason that the forex market plays such a critical role in determining exchange rates.
The World And The Forex Market
It is possible to day trade currencies along with trading stocks. In case you have ever wondered how the foreign exchange market, or Forex, works, here is an overview of some of the markets basic features:
First and foremost there are the foreign exchange rates, which is the proportional value of two currencies. To be more specific, it’s the required quantity of one particular currency to sell or buy a unit of another currency. There are two methods used to express a foreign exchange rate. The most common method would express the amount of foreign currency that is needed to buy one U.S. dollar. For instance, if a foreign exchange quote expressed as USD/CND at 1.4300, this means that one U.S. dollar can be exchanged for 1.43 Canadian dollars, and vise versa. The second method is when the foreign exchange rate is expressed under the terms that the USD amount can be exchanged for one unit of a foreign currency. For instance, if a quote of CND/USD at 0.6700 means that one Canadian dollar can be exchanged for the same 0.6700 USD. When the USD is not used to convey an exchange rate, then the “cross rate” term is used to convey the proportional values between the two currencies. For instance, if the quote is DEM/SFR at .7000, this means that on German Mark can be exchanged for only .7 Swiss Francs.
Basis points are normally when the foreign exchange rate is expressed by a whole number followed by four decimal points. For example, 0.0001 is called a basis point. Therefore, if an exchange rate rises from 1.4550 to 1.4590, then the currency is said to have changed by 40 basis points.
The Forex market is used to invest in other countries or even to buy foreign products. Sometimes individuals or firms who wish to buy foreign currencies or products, may need to get hold of some of the currency, beforehand, from the country in which they wish to do business with. Also, the exporters may require payment for services or goods in their own currency, or in USD, which is accepted throughout the world.
In the Forex market, a majority of selling and buying of foreign currencies throughout the world is taken place, mostly by the large commercial banks, who are the major traders in the Forex market. With five major institutions based throughout the world in New York, London, Frankfurt, Zurich and Tokyo, the Forex market is considered the largest financial market in the world by far, with the multitude of trading volumes exceeding 1.5 trillion USD on most days.
The foreign exchange spreads are when the exchange rates in the Forex market are cited as a two-tier “bid” or “ask” rate. For instance, when a USD and a DEM is cited as 1.6000/15, the Forex trader who cites this exchange rate is agreeing to buy the DEM’s at 1.6000 and sell them at 1.6015. The “spread” is the actual difference between cites of purchase and cites of sale and also illustrates the profit expected from the transaction for the Forex trader. The “spread” may vary comprehensively on any specific currency; all depending on the currency’s strength or weakness, and even it’s past history or prospective volatility.
Forex traders who consist primarily of world wide network interbank traders are connected together by computers and telephone lines and are constantly negotiating prices among one another. These artful negotiations normally ensue in a market bid, or asking price, for a specific currency that is then introduced continuously into computers to be displayed on official quote screens. When the Forex exchange rates are quoted between banks, this is called “Interbank Rates.”
Many individuals may not be able to get hold of some foreign currencies at Forex rates unless they become licensed traders through Forex. Instead, those individuals may be able to come across foreign currency through a commercial bank, which may charge the individuals with either a commission or a higher spread than those reigning in the Forex market. Sometimes these commercial banks will even charge individuals both commission and higher spread as to enable the bank to make a reasonable profit from the transaction.
The world is big and so is the world of the Forex market.
First and foremost there are the foreign exchange rates, which is the proportional value of two currencies. To be more specific, it’s the required quantity of one particular currency to sell or buy a unit of another currency. There are two methods used to express a foreign exchange rate. The most common method would express the amount of foreign currency that is needed to buy one U.S. dollar. For instance, if a foreign exchange quote expressed as USD/CND at 1.4300, this means that one U.S. dollar can be exchanged for 1.43 Canadian dollars, and vise versa. The second method is when the foreign exchange rate is expressed under the terms that the USD amount can be exchanged for one unit of a foreign currency. For instance, if a quote of CND/USD at 0.6700 means that one Canadian dollar can be exchanged for the same 0.6700 USD. When the USD is not used to convey an exchange rate, then the “cross rate” term is used to convey the proportional values between the two currencies. For instance, if the quote is DEM/SFR at .7000, this means that on German Mark can be exchanged for only .7 Swiss Francs.
Basis points are normally when the foreign exchange rate is expressed by a whole number followed by four decimal points. For example, 0.0001 is called a basis point. Therefore, if an exchange rate rises from 1.4550 to 1.4590, then the currency is said to have changed by 40 basis points.
The Forex market is used to invest in other countries or even to buy foreign products. Sometimes individuals or firms who wish to buy foreign currencies or products, may need to get hold of some of the currency, beforehand, from the country in which they wish to do business with. Also, the exporters may require payment for services or goods in their own currency, or in USD, which is accepted throughout the world.
In the Forex market, a majority of selling and buying of foreign currencies throughout the world is taken place, mostly by the large commercial banks, who are the major traders in the Forex market. With five major institutions based throughout the world in New York, London, Frankfurt, Zurich and Tokyo, the Forex market is considered the largest financial market in the world by far, with the multitude of trading volumes exceeding 1.5 trillion USD on most days.
The foreign exchange spreads are when the exchange rates in the Forex market are cited as a two-tier “bid” or “ask” rate. For instance, when a USD and a DEM is cited as 1.6000/15, the Forex trader who cites this exchange rate is agreeing to buy the DEM’s at 1.6000 and sell them at 1.6015. The “spread” is the actual difference between cites of purchase and cites of sale and also illustrates the profit expected from the transaction for the Forex trader. The “spread” may vary comprehensively on any specific currency; all depending on the currency’s strength or weakness, and even it’s past history or prospective volatility.
Forex traders who consist primarily of world wide network interbank traders are connected together by computers and telephone lines and are constantly negotiating prices among one another. These artful negotiations normally ensue in a market bid, or asking price, for a specific currency that is then introduced continuously into computers to be displayed on official quote screens. When the Forex exchange rates are quoted between banks, this is called “Interbank Rates.”
Many individuals may not be able to get hold of some foreign currencies at Forex rates unless they become licensed traders through Forex. Instead, those individuals may be able to come across foreign currency through a commercial bank, which may charge the individuals with either a commission or a higher spread than those reigning in the Forex market. Sometimes these commercial banks will even charge individuals both commission and higher spread as to enable the bank to make a reasonable profit from the transaction.
The world is big and so is the world of the Forex market.
What is Currency Markets?
The currency market includes the Foreign Currency Market and the Euro-currency Market. The Foreign Currency Market is virtual. There is no one central physical location that is the foreign currency market. It exists in the dealing rooms of various central banks, large international banks, and some large corporations. The dealing rooms are connected via telephone, computer, and fax. Some countries co-locate their dealing rooms in one center. The Euro-currency Market is where borrowing and lending of currency takes place. Interest rates for the various currencies are set in this market.
Trading on the Foreign Exchange Market establishes rates of exchange for currency. Exchange rates are constantly fluctuating on the forex market. As demand rises and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous rate quotes are available from a service provided by Reuters. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.
The foreign exchange market has no regulation, no restrictions or overseeing board. Should there be a world monetary crisis in this market; there is no mechanism to stop trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange trading. In their “Guidelines for Foreign Exchange Trading”, they outline 50 best practices for trading on the forex market.
Spot Exchange
The spot exchange is the simplest contract. A spot exchange contract identifies two parties, the currency they are buying or selling and the currency they expect to receive in exchange. The currencies are exchanged at the prevailing spot rate at the time of the contract. The spot rate is constantly fluctuating. When a spot exchange is agreed upon, the contract is defined to be executed immediately. In reality, a series of confirmations occurs between the two parties. Documentation is sent and received from both parties detailing the exchange rate agreed upon and the amounts of currency involved. The funds actually move between banks two days after the spot transaction is agreed upon.
Forward Exchange
The forward exchange contract is similar to the spot exchange. However, the time period of the contract is significantly longer. These contracts use a forward exchange rate that differs from the spot rate. The difference between the forward rate and the spot rate reflects the difference in interest rates between the two currencies. This prevents an opportunity for arbitrage. If the rates did not differ, there would be a profit difference in the currencies. That is, investing in one currency for a year and then selling it should be the same profit or loss as setting up a forward contract at the forward rate one year in the future. Investing in one currency would be more profitable than investing in the other. Thus there would exist an opportunity for arbitrage. Forward exchange contracts are settled at a specified date in the future. The parties exchange funds at this date. Forward contracts are typically custom written between the party needing currency and the bank, or between banks.
Currency Futures and Swap Transactions
Currency futures are standardized forward contracts. The amounts of currency, time to expiry, and exchange rates are standardized. The standardized expiry times are specific dates in March, June, September, and December. These futures are traded on the Chicago Mercantile Exchange (CME). Futures give the buyer an option of setting up a contract to exchange currency in the future. This contract can be purchased on an exchange, rather than custom negotiated with a bank like a forward contract.
A currency swap is an agreement to two exchanges in currency, one a spot and one a forward. An immediate spot exchange is executed, followed later by a reverse exchange. The two exchanges occur at different exchange rates. It is the difference in the two exchange rates that determines the swap price. There is also something called a currency swap. This is a method to exchange an income stream of one currency for another.
Currency Options
A currency option gives the holder the right, but not the obligation, either to buy (call) from the option writer, or to sell (put) to the option writer, a stated quantity of one currency in exchange for another at a fixed rate of exchange, called the strike price. The options can be American, which allows an option to be exercised until a fixed day, called the day of expiry, or European, which allows exercise only on the day of expiry, not before. The option holder pays a premium to the option writer for the option.
The option differs from other currency contracts in that the holder has a choice, or option, of whether they will exercise it or not. If exchange rates are more favorable than the rate guaranteed by the option when the holder needs to exchange currency, they can choose to exchange the currency on the spot exchange rather than use the option. They lose only the option premium. Options allow holders to limit their risk of exposure to adverse changes in the exchange rates.
Hedging
It is also common for currency options to be used to hedge cash positions. Companies are not typically in the business of gambling with their profits on deals. It is in the company’s best interest to lock in an exchange rate they can count on. They are motivated to insure that their profits are as expected. Two ways they might do this are to enter forward contracts or to buy options.
They would select an exchange rate that would be acceptable but not too expensive. They might choose to buy a slightly out-of-the-money call option to cover them if the currency exchange rate falls. If it stays the same or rises, they will exchange at the spot exchange rate at the time the payment is due.
Trading on the Foreign Exchange Market establishes rates of exchange for currency. Exchange rates are constantly fluctuating on the forex market. As demand rises and falls for particular currencies, their exchange rates adjust accordingly. Instantaneous rate quotes are available from a service provided by Reuters. A rate of exchange for currencies is the ratio at which one currency is exchanged for another.
The foreign exchange market has no regulation, no restrictions or overseeing board. Should there be a world monetary crisis in this market; there is no mechanism to stop trading. The Federal Reserve Bank of New York publishes guidelines for Foreign Exchange trading. In their “Guidelines for Foreign Exchange Trading”, they outline 50 best practices for trading on the forex market.
Spot Exchange
The spot exchange is the simplest contract. A spot exchange contract identifies two parties, the currency they are buying or selling and the currency they expect to receive in exchange. The currencies are exchanged at the prevailing spot rate at the time of the contract. The spot rate is constantly fluctuating. When a spot exchange is agreed upon, the contract is defined to be executed immediately. In reality, a series of confirmations occurs between the two parties. Documentation is sent and received from both parties detailing the exchange rate agreed upon and the amounts of currency involved. The funds actually move between banks two days after the spot transaction is agreed upon.
Forward Exchange
The forward exchange contract is similar to the spot exchange. However, the time period of the contract is significantly longer. These contracts use a forward exchange rate that differs from the spot rate. The difference between the forward rate and the spot rate reflects the difference in interest rates between the two currencies. This prevents an opportunity for arbitrage. If the rates did not differ, there would be a profit difference in the currencies. That is, investing in one currency for a year and then selling it should be the same profit or loss as setting up a forward contract at the forward rate one year in the future. Investing in one currency would be more profitable than investing in the other. Thus there would exist an opportunity for arbitrage. Forward exchange contracts are settled at a specified date in the future. The parties exchange funds at this date. Forward contracts are typically custom written between the party needing currency and the bank, or between banks.
Currency Futures and Swap Transactions
Currency futures are standardized forward contracts. The amounts of currency, time to expiry, and exchange rates are standardized. The standardized expiry times are specific dates in March, June, September, and December. These futures are traded on the Chicago Mercantile Exchange (CME). Futures give the buyer an option of setting up a contract to exchange currency in the future. This contract can be purchased on an exchange, rather than custom negotiated with a bank like a forward contract.
A currency swap is an agreement to two exchanges in currency, one a spot and one a forward. An immediate spot exchange is executed, followed later by a reverse exchange. The two exchanges occur at different exchange rates. It is the difference in the two exchange rates that determines the swap price. There is also something called a currency swap. This is a method to exchange an income stream of one currency for another.
Currency Options
A currency option gives the holder the right, but not the obligation, either to buy (call) from the option writer, or to sell (put) to the option writer, a stated quantity of one currency in exchange for another at a fixed rate of exchange, called the strike price. The options can be American, which allows an option to be exercised until a fixed day, called the day of expiry, or European, which allows exercise only on the day of expiry, not before. The option holder pays a premium to the option writer for the option.
The option differs from other currency contracts in that the holder has a choice, or option, of whether they will exercise it or not. If exchange rates are more favorable than the rate guaranteed by the option when the holder needs to exchange currency, they can choose to exchange the currency on the spot exchange rather than use the option. They lose only the option premium. Options allow holders to limit their risk of exposure to adverse changes in the exchange rates.
Hedging
It is also common for currency options to be used to hedge cash positions. Companies are not typically in the business of gambling with their profits on deals. It is in the company’s best interest to lock in an exchange rate they can count on. They are motivated to insure that their profits are as expected. Two ways they might do this are to enter forward contracts or to buy options.
They would select an exchange rate that would be acceptable but not too expensive. They might choose to buy a slightly out-of-the-money call option to cover them if the currency exchange rate falls. If it stays the same or rises, they will exchange at the spot exchange rate at the time the payment is due.
Forex Tutorial: The Basics Of Forex Analysis
The Forex trading market is an around-the-clock cash market where the currencies of nations are bought and sold, typically via brokers. For example, you buy Euros, paying with U.S. Dollars, or you sell Canadian Dollars for Japanese Yen. Forex prices can change at any moment in response to real-time events, such as political unrest, crude oil prices, inflation, import and export prices, or industrial production.
Currency market players typically use “Forex analysis” as a tool in predicting currency price movements. Forex analysis itself is divided into two types: fundamental and technical. A fundamental analysis uses economic and political factors as a means of predicting currency movements. A technical analysis uses reliable historical data as a means of forecasting these movements. The purpose of this article is to discuss the basic principles of fundamental and technical analysis.
A fundamental analysis uses economic and political factors, such as housing starts, the unemployment rate, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. Government economic indicators. Some of these indicators are the Gross Domestic Product (GDP), Foreign Exchange Rates, Import and Export Prices, Industrial Production/Capacity Utilization, the Composite Index of Leading Indicators, Consumer Credit, the Consumer Price Index (CPI), Retail Sales, Housing Starts, the Employment Cost Index, and Consumer Confidence.
All of these Federal economic indicators have a marked effect on both the stock market and Forex. Some of these indicators are released weekly, while others are released monthly or quarterly. Their sources include the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the U.S. Department of Agriculture, the U.S. Bureau of Economic Analysis (BEA), and the U.S. Census Bureau.
Forex traders must take other economic indicators into consideration as well. The world’s leading economies (for example, the United Kingdom, Japan, France, and Germany) also release their own economic indicators that will have an impact on the Forex market. For example, leading economic indicators in the United Kingdom include Housing Prices, Gross Domestic Product (GDP), Vehicles per 1,000 People, Telephones per 1,000 People, and the Percentage of People Employed in Agriculture.
A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.
Investopedia states that “In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.”
For example, during the back-to-school buying season, the technical analyst might observe that more people are going into clothing stores than into stores selling flowers. Likewise, the technical analyst might observe that more men are going into stores selling flowers on Valentine’s Day than into clothing stores.
Here is another example. Oil prices dramatically increase, thus creating inflation. Interest rates rise as a means of controlling inflation. One historical result of higher interest rates is less money to spend, thus slowing economic growth. Another historical result is increased foreign investment in the currency affected by the higher interest rates, thus strengthening it.
The technical analyst typically uses charts as a tool for predicting currency price movements. The three most popular kinds of charts are line charts, vertical bar charts, and candlestick charts.
Some Forex traders depend on fundamental analysis while others depend on technical analysis. However, many successful Forex traders use a combination of both strategies. However, the important point to remember here is that no one strategy or combination of strategies is 100% certain.
Currency market players typically use “Forex analysis” as a tool in predicting currency price movements. Forex analysis itself is divided into two types: fundamental and technical. A fundamental analysis uses economic and political factors as a means of predicting currency movements. A technical analysis uses reliable historical data as a means of forecasting these movements. The purpose of this article is to discuss the basic principles of fundamental and technical analysis.
A fundamental analysis uses economic and political factors, such as housing starts, the unemployment rate, or inflation, as a means of predicting currency movements. Fundamental analysis is concerned with the reasons or causes for currency movements. Many Forex traders who rely on fundamental analysis plan their trading strategies around a number of key U.S. Government economic indicators. Some of these indicators are the Gross Domestic Product (GDP), Foreign Exchange Rates, Import and Export Prices, Industrial Production/Capacity Utilization, the Composite Index of Leading Indicators, Consumer Credit, the Consumer Price Index (CPI), Retail Sales, Housing Starts, the Employment Cost Index, and Consumer Confidence.
All of these Federal economic indicators have a marked effect on both the stock market and Forex. Some of these indicators are released weekly, while others are released monthly or quarterly. Their sources include the Federal Reserve Board, the U.S. Bureau of Labor Statistics, the U.S. Department of Agriculture, the U.S. Bureau of Economic Analysis (BEA), and the U.S. Census Bureau.
Forex traders must take other economic indicators into consideration as well. The world’s leading economies (for example, the United Kingdom, Japan, France, and Germany) also release their own economic indicators that will have an impact on the Forex market. For example, leading economic indicators in the United Kingdom include Housing Prices, Gross Domestic Product (GDP), Vehicles per 1,000 People, Telephones per 1,000 People, and the Percentage of People Employed in Agriculture.
A technical analysis uses historical data as a means of predicting currency movements. The technical analyst believes that history repeats itself over and over again. Technical analysis is not concerned with the reasons for currency movements (for example, interest rates or inflation). Instead, it believes that historical currency movements are a clear indication of future ones.
Investopedia states that “In a shopping mall, a fundamental analyst would go to each store, study the product that was being sold, and then decide whether to buy it or not. By contrast, a technical analyst would sit on a bench in the mall and watch people go into the stores. Disregarding the intrinsic value of the products in the store, his or her decision would be based on the patterns or activity of people going into each store.”
For example, during the back-to-school buying season, the technical analyst might observe that more people are going into clothing stores than into stores selling flowers. Likewise, the technical analyst might observe that more men are going into stores selling flowers on Valentine’s Day than into clothing stores.
Here is another example. Oil prices dramatically increase, thus creating inflation. Interest rates rise as a means of controlling inflation. One historical result of higher interest rates is less money to spend, thus slowing economic growth. Another historical result is increased foreign investment in the currency affected by the higher interest rates, thus strengthening it.
The technical analyst typically uses charts as a tool for predicting currency price movements. The three most popular kinds of charts are line charts, vertical bar charts, and candlestick charts.
Some Forex traders depend on fundamental analysis while others depend on technical analysis. However, many successful Forex traders use a combination of both strategies. However, the important point to remember here is that no one strategy or combination of strategies is 100% certain.
Forex Trading - understanding commissions, spreads and trading costs
The forex market is quickly becoming one of the most popular markets for trading.
Not only are the experienced traders looking to this market to maximize their trading returns, but many new, individual investors are now able to trade the Forex market - just as they do stocks and futures.
More and more individuals are seeing Forex not only as a new way to diversify their portfolio, but are also finding that it is becoming the most profitable component of their investments.
And that’s because of the many advantages Forex offers over other markets like stocks or commodities. Here’s what you will typically see advertized about Forex:
- Unparallelled liquidity. It is the largest financial market in the world by far. Almost $2 trillion being traded daily!
- Excellent leverage potential. Individual investors have access to leverage of 100:1 and even 200:1
- No Commissions
- Low trading costs.
And yes, the Forex market really does offer all these advantages.
But the last two points above talk about costs, and that’s what we’d like to focus on in this article.
Like any trading, there are costs involved, and, while these may be much lower than they used to be, it is important to understand what those are.
Let’s start by looking at stock trading, something that most of us investors are pretty familiar with.
When trading stocks, most investors will have a trading account with a broker somewhere and will have investment funds deposited in that account.
The broker will then execute the trades on behalf of the account holder, and of course, in return for providing that service, the broker will want to be compensated.
With stocks, typically, the broker will earn a commission for executing the trade. They will charge either a fixed dollar amount per trade, or a dollar amount per share, or (most commonly) a scaled commission based on how big your trade is.
And, they will charge it on both sides of the transaction. That is to say, when you buy the stock you get charged commission, AND then when you sell that same stock you get charged another commission.
With Forex trading, the brokers constantly advertise “no commission”. And, of course that’s true - except for a few brokers, who do charge a commission similar to stocks.
But also, of course, the brokers aren’t performing their trading services for free. They too make money.
The way they do that is by charging the investor a “spread”. Simply put, the spread is the difference between the bid price and the ask price for the currency being traded.
The broker will add this spread onto the price of the trade and keep it as their fee for trading.
So, while it isn’t a commission per se, it behaves in practically the same way. It is just a little more hidden.
The good news though is that typically this spread is only charged on one side of the transaction. In other words, you don’t pay the spread when you buy AND then again when you sell. It is usually only charged on the “buy” side of the trades.
So the spread really is your primary cost of trading the Forex and you should pay attention to the details of what the different brokers offer.
The spreads offered can vary pretty dramatically from broker to broker. And while it may not seem like much of a difference to be trading with a 5 pip spread vs a 4 pip spread, it actually can add up very quickly when you multiply it out by how many trades you make and how much money you’re trading. Think about it, 4 pips vs 5 pips is a difference of 25% on your trading costs.
The other thing to recognize is that spreads can vary based on what currencies you’re trading and what type of account you open.
Most brokers will give you different spreads for different currencies. The most popular currency pairs like the EURUSD or GBPUSD will typically have the lowest spreads, while currencies that have less demand will likely be traded with higher spreads.
Be sure to think about what currencies you are most likely to be trading and find out what your spreads will be for those currencies.
Also, some brokers will offer different spreads for different types of accounts. A mini account, for example, may be subject to higher spreads than a full contract account.
And finally, because the spreads really are the difference between bid prices and ask prices as determined by the free market, it is important to recognize that they are not “guaranteed”. Most brokers will tell you that there may be times during periods of low demand, or very active trading when the spreads widen and you will be charged that wider spread.
These do tend to be rarer situations because the volume in the Forex market is so large and demand and supply are generally quite predictable. But they do occur, especially with some of the lesser traded currencies. So it’s important to be aware of that.
In summary then, when trading Forex, understand that the “spread” is truly your most important consideration for trading costs.
Spreads can vary significantly between brokers, account types and currencies traded. And small differences in the spread can really add up to thousands of dollars in trading costs over even just a few months.
So be sure to consider carefully what currencies you are going to be trading, how frequently, and in what type of account and use those factors to help you decide which broker can offer you the best trading costs and allow you to keep more of your returns as net profits!
Not only are the experienced traders looking to this market to maximize their trading returns, but many new, individual investors are now able to trade the Forex market - just as they do stocks and futures.
More and more individuals are seeing Forex not only as a new way to diversify their portfolio, but are also finding that it is becoming the most profitable component of their investments.
And that’s because of the many advantages Forex offers over other markets like stocks or commodities. Here’s what you will typically see advertized about Forex:
- Unparallelled liquidity. It is the largest financial market in the world by far. Almost $2 trillion being traded daily!
- Excellent leverage potential. Individual investors have access to leverage of 100:1 and even 200:1
- No Commissions
- Low trading costs.
And yes, the Forex market really does offer all these advantages.
But the last two points above talk about costs, and that’s what we’d like to focus on in this article.
Like any trading, there are costs involved, and, while these may be much lower than they used to be, it is important to understand what those are.
Let’s start by looking at stock trading, something that most of us investors are pretty familiar with.
When trading stocks, most investors will have a trading account with a broker somewhere and will have investment funds deposited in that account.
The broker will then execute the trades on behalf of the account holder, and of course, in return for providing that service, the broker will want to be compensated.
With stocks, typically, the broker will earn a commission for executing the trade. They will charge either a fixed dollar amount per trade, or a dollar amount per share, or (most commonly) a scaled commission based on how big your trade is.
And, they will charge it on both sides of the transaction. That is to say, when you buy the stock you get charged commission, AND then when you sell that same stock you get charged another commission.
With Forex trading, the brokers constantly advertise “no commission”. And, of course that’s true - except for a few brokers, who do charge a commission similar to stocks.
But also, of course, the brokers aren’t performing their trading services for free. They too make money.
The way they do that is by charging the investor a “spread”. Simply put, the spread is the difference between the bid price and the ask price for the currency being traded.
The broker will add this spread onto the price of the trade and keep it as their fee for trading.
So, while it isn’t a commission per se, it behaves in practically the same way. It is just a little more hidden.
The good news though is that typically this spread is only charged on one side of the transaction. In other words, you don’t pay the spread when you buy AND then again when you sell. It is usually only charged on the “buy” side of the trades.
So the spread really is your primary cost of trading the Forex and you should pay attention to the details of what the different brokers offer.
The spreads offered can vary pretty dramatically from broker to broker. And while it may not seem like much of a difference to be trading with a 5 pip spread vs a 4 pip spread, it actually can add up very quickly when you multiply it out by how many trades you make and how much money you’re trading. Think about it, 4 pips vs 5 pips is a difference of 25% on your trading costs.
The other thing to recognize is that spreads can vary based on what currencies you’re trading and what type of account you open.
Most brokers will give you different spreads for different currencies. The most popular currency pairs like the EURUSD or GBPUSD will typically have the lowest spreads, while currencies that have less demand will likely be traded with higher spreads.
Be sure to think about what currencies you are most likely to be trading and find out what your spreads will be for those currencies.
Also, some brokers will offer different spreads for different types of accounts. A mini account, for example, may be subject to higher spreads than a full contract account.
And finally, because the spreads really are the difference between bid prices and ask prices as determined by the free market, it is important to recognize that they are not “guaranteed”. Most brokers will tell you that there may be times during periods of low demand, or very active trading when the spreads widen and you will be charged that wider spread.
These do tend to be rarer situations because the volume in the Forex market is so large and demand and supply are generally quite predictable. But they do occur, especially with some of the lesser traded currencies. So it’s important to be aware of that.
In summary then, when trading Forex, understand that the “spread” is truly your most important consideration for trading costs.
Spreads can vary significantly between brokers, account types and currencies traded. And small differences in the spread can really add up to thousands of dollars in trading costs over even just a few months.
So be sure to consider carefully what currencies you are going to be trading, how frequently, and in what type of account and use those factors to help you decide which broker can offer you the best trading costs and allow you to keep more of your returns as net profits!
Making Money From Stock Market - Tips for Beginners
Making money from stock markets requires trading in the stock market. Cautious buying, holding and selling of stocks generate profits and money. Stock trading is the function that interacts and organizes in the stock market.
This market involves buying and selling of millions of shares all over the world, and generates profit.
As a beginner, you must understand in effect how the market works. You really don’t have to know all of the technicalities of buying and selling stocks.
The first and foremost you need to know is the functioning of the exchange floor, irrespective of whether you trade through the floor or electronically.
When the market opens, hundreds of people are seen fast moving about shouting and signaling to one another, staring at monitors, and entering data into terminals, or busy on cell-phones on the exchange floor. It looks like a complete fiasco. However, by the time the end of the day approaches, the market has worked out all the trades, and is all set for the next day.
These are the steps in a simple trade on the exchange floor of any major Stock Exchange:
You instruct your broker to buy a number of shares of a company at the current market price.
The broker’s order department passes the order on to their floor clerk, the dealing official, in the exchange.
From this person it goes to one of the firm’s floor traders whose task it is to find another floor trader wanting to sell that number of shares of the company you wanted. Each floor trader has particular knowledge of which floor traders deal in what stocks.
The two come together on a price and seal the deal. The notification process moves backward along the line and your broker gets back to you with the final price. You receive the confirmation notice in the mail after a few days.
Beginners should avoid complicating things trying to get rich in a day by venturing into every nook and cranny without knowing a thing or two about them.
To begin with, you need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order. Choose the right broker rationally. This is a crucial point of money making from stocks.
Depend on your comprehension and your broker, who must be a professional. Never bypass understanding fully the cause(s) behind a bad result when it occurs. Learn from your experiences, document them, and keep reading them once in a while.
This market involves buying and selling of millions of shares all over the world, and generates profit.
As a beginner, you must understand in effect how the market works. You really don’t have to know all of the technicalities of buying and selling stocks.
The first and foremost you need to know is the functioning of the exchange floor, irrespective of whether you trade through the floor or electronically.
When the market opens, hundreds of people are seen fast moving about shouting and signaling to one another, staring at monitors, and entering data into terminals, or busy on cell-phones on the exchange floor. It looks like a complete fiasco. However, by the time the end of the day approaches, the market has worked out all the trades, and is all set for the next day.
These are the steps in a simple trade on the exchange floor of any major Stock Exchange:
You instruct your broker to buy a number of shares of a company at the current market price.
The broker’s order department passes the order on to their floor clerk, the dealing official, in the exchange.
From this person it goes to one of the firm’s floor traders whose task it is to find another floor trader wanting to sell that number of shares of the company you wanted. Each floor trader has particular knowledge of which floor traders deal in what stocks.
The two come together on a price and seal the deal. The notification process moves backward along the line and your broker gets back to you with the final price. You receive the confirmation notice in the mail after a few days.
Beginners should avoid complicating things trying to get rich in a day by venturing into every nook and cranny without knowing a thing or two about them.
To begin with, you need a broker to handle your trades – individuals don’t have access to the electronic markets. Your broker accesses the exchange network and the system finds a buyer or seller depending on your order. Choose the right broker rationally. This is a crucial point of money making from stocks.
Depend on your comprehension and your broker, who must be a professional. Never bypass understanding fully the cause(s) behind a bad result when it occurs. Learn from your experiences, document them, and keep reading them once in a while.
Forex As an Asset Class and Financial Instrument
Forex has always been classified as an asset and an instrument of financial transaction including both the spot and futures market. By one argument, the forex market makes a pretty much bigger turn over on a daily basis than the commodities and services trade although conceptually forex is there to facilitate the latter two. Need any more evidence for forex’s status as financial instrument and an asset class of its own right?
Sequentially, the logic goes that any financial instrument can be thought of as fit to be an asset class.
So What Is A Financial Instrument?
Any document, either virtual or real, which is assigned some monetary value and legally tradeable in the market as a package of an asset, is a financial instrument. The most traded one amongst all financial instruments is the equity based one.
Plain vanilla is an example of simplest financial instruments which has a simple strike price and expiration date. This option is devoid of advanced features but optionally there can be what is known as a knock-in option which activates the instrument only if the underlying stocks strike a preset price.
But coming back to the discussion of forex as an asset class, the overall foreign exchange traded daily has jumped by 38% between April 2005 and April 2006 and has more than doubled since 2001. One significant reason that can be attributed to this is growing acceptance of forex as asset class strongly backed up by the fund management assets such as hedge funds and pension funds. On the same breath, one can not negate the advent of easier internet based retail trading platforms which pitched into attract large volumes.
We have said that forex is an asset class. The asset class is basically categorized as debt based and equity based depending on whether the investor gets to own the asset or not. For example, debt asset is when an investor extends a loan to the owner of asset and the equity based asset reflects the ownership of the investor.
What Does It Mean To A Retail Investor?
The categorized forex asset class is a wise investment opportunity for a retailer. You can systematically acquire and hold a foreign currency, such as euro or pound sterling till it appreciates sufficiently over time. Speculative forex trading is another avenue but it is ridden with significant risk factors. Transnational executives hold a considerable amount of forex in their kitty.
Sequentially, the logic goes that any financial instrument can be thought of as fit to be an asset class.
So What Is A Financial Instrument?
Any document, either virtual or real, which is assigned some monetary value and legally tradeable in the market as a package of an asset, is a financial instrument. The most traded one amongst all financial instruments is the equity based one.
Plain vanilla is an example of simplest financial instruments which has a simple strike price and expiration date. This option is devoid of advanced features but optionally there can be what is known as a knock-in option which activates the instrument only if the underlying stocks strike a preset price.
But coming back to the discussion of forex as an asset class, the overall foreign exchange traded daily has jumped by 38% between April 2005 and April 2006 and has more than doubled since 2001. One significant reason that can be attributed to this is growing acceptance of forex as asset class strongly backed up by the fund management assets such as hedge funds and pension funds. On the same breath, one can not negate the advent of easier internet based retail trading platforms which pitched into attract large volumes.
We have said that forex is an asset class. The asset class is basically categorized as debt based and equity based depending on whether the investor gets to own the asset or not. For example, debt asset is when an investor extends a loan to the owner of asset and the equity based asset reflects the ownership of the investor.
What Does It Mean To A Retail Investor?
The categorized forex asset class is a wise investment opportunity for a retailer. You can systematically acquire and hold a foreign currency, such as euro or pound sterling till it appreciates sufficiently over time. Speculative forex trading is another avenue but it is ridden with significant risk factors. Transnational executives hold a considerable amount of forex in their kitty.
There Are Big Bucks In Knowing Foreign Exchange Trading!
The acquisition or sale of one national currency in exchange for another nation’s currency, usually conducted in a market setting is called as the Foreign Exchange Trading. The concept of Foreign Trading makes it possible for clients to do international transactions.
It can be mainly used during imports and exports and the movement of capital between countries. The value of one foreign currency in relation to another is defined by the exchange rate during the Foreign Exchange Trading.
Foreign Trading is also known as the FX Trading. Here the clients are able to hedge against, or speculate upon, changes aspect element within the exchange rate of two currencies. Foreign Exchange Trading services provide a chance for clients to trade FX.
Exchange Trading is done on the magnificent excellent foreign exchange market. In Foreign Exchange Trading the methods and instruments used to adjust the payment of debts between two nations that make use of different currency systems. A nation’s balance of payments has an important effect resting on the magnificent exchange rate of its currency.
Bills of trade, drafts, checks, and telegraphic orders are the principal means of payment in international transactions of the Foreign Trading. The rate of exchange is the price in local currency of one unit of foreign currency and is determined by the comparative supply and demand of the currencies resource within the foreign exchange market.
Buying or promoting foreign currency in order to profit from rapid changes trait within the rate of exchange is known as an arbitrage in Foreign Exchange Trading.
Demand of Foreign Exchange Trading
The chief demand for Exchange Trading within a country comes from importers of foreign goods, purchasers of foreign securities, government agencies buying goods and services abroad, and travelers.
Foreign Exchange Trading is one of the nascent market opportunities when it comes to the individual investor. Until recently only large traders and multi conglomerate companies were able to participate within the foreign exchange markets.
Now with the internet and many courses both online as well as on DVD, Videos and hard cover books there are a wonderful many resources available to the individual investor to help them become currency traders and earn incomes element within the six figure range.
There are numerous books available relating to Foreign Trading that will help the novice investor get started, explaining some of the basic strategies, even explaining all of the jargon that is new daily by currency traders all over the globe.
Other books to understand the Foreign Exchange Trading may assist the more intuitive and seasoned investor who is expecting to receive a more technical analysis of various currency trading strategies and markets.
There are a number of excellent courses available by the many supporting comments that these courses have received from many of their participants. They come from just about every repeated level of investor including the beginners as well as the more experienced investors.
Many of these courses for Foreign Trading include a variety of books; pamphlets and some will even include videos of various investment specialists providing you with their hands on training experience on Foreign Exchange Trading.
The e-books that are available to understand the Foreign Exchange more efficiently can typically be downloaded over the Internet, so you can most insolently begin almost as soon as you have paid your fees and downloaded the apropos files.
So no need of waiting for snail mail deliveries and you can begin immediately Foreign Exchange Trading soon. Some of the e-books and courses related to Foreign Trading will also include discounts and additional benefits when you sign up for an e-book or a course.
This combination can be of brilliant value when compared to some of the more long-established methods of learning the business of Foreign Exchange Trading.
Foreign Exchange rates refer to the amount of currency you obtain when you buy one currency with another currency. That is, it is most important to understand if you are traveling to England. In general, Foreign Exchange Trading if you or someone that understands and has expert knowledge live in approval of the United States, you then carry dollars.
You then ought to change these dollars for British Pounds and review the foreign currency rates to see how many US dollars it could take to buy one British Pound. Similarly, it would apply to every single country you might visit. Importers and exporters of goods are also concerned about the foreign currency rates.
The traders in Foreign Trading need foreign currency to make their business transactions. A buyer in England of United States goods watches the foreign currency rates to try and obtain a better price for the United States dollars they need to buy the United States goods.
During the Foreign Exchange Trading most foreign currency rates change all the time. The rates that do change on a daily or even hourly basis are called as the floating currencies. This means that market forces determine the price.
If more dollars are being bought and more British Pounds are being sold, the United States dollar then increases in value.
Thus, Foreign Exchange Trading should always be done keeping an alert eye on the Foreign Exchange Market.
It can be mainly used during imports and exports and the movement of capital between countries. The value of one foreign currency in relation to another is defined by the exchange rate during the Foreign Exchange Trading.
Foreign Trading is also known as the FX Trading. Here the clients are able to hedge against, or speculate upon, changes aspect element within the exchange rate of two currencies. Foreign Exchange Trading services provide a chance for clients to trade FX.
Exchange Trading is done on the magnificent excellent foreign exchange market. In Foreign Exchange Trading the methods and instruments used to adjust the payment of debts between two nations that make use of different currency systems. A nation’s balance of payments has an important effect resting on the magnificent exchange rate of its currency.
Bills of trade, drafts, checks, and telegraphic orders are the principal means of payment in international transactions of the Foreign Trading. The rate of exchange is the price in local currency of one unit of foreign currency and is determined by the comparative supply and demand of the currencies resource within the foreign exchange market.
Buying or promoting foreign currency in order to profit from rapid changes trait within the rate of exchange is known as an arbitrage in Foreign Exchange Trading.
Demand of Foreign Exchange Trading
The chief demand for Exchange Trading within a country comes from importers of foreign goods, purchasers of foreign securities, government agencies buying goods and services abroad, and travelers.
Foreign Exchange Trading is one of the nascent market opportunities when it comes to the individual investor. Until recently only large traders and multi conglomerate companies were able to participate within the foreign exchange markets.
Now with the internet and many courses both online as well as on DVD, Videos and hard cover books there are a wonderful many resources available to the individual investor to help them become currency traders and earn incomes element within the six figure range.
There are numerous books available relating to Foreign Trading that will help the novice investor get started, explaining some of the basic strategies, even explaining all of the jargon that is new daily by currency traders all over the globe.
Other books to understand the Foreign Exchange Trading may assist the more intuitive and seasoned investor who is expecting to receive a more technical analysis of various currency trading strategies and markets.
There are a number of excellent courses available by the many supporting comments that these courses have received from many of their participants. They come from just about every repeated level of investor including the beginners as well as the more experienced investors.
Many of these courses for Foreign Trading include a variety of books; pamphlets and some will even include videos of various investment specialists providing you with their hands on training experience on Foreign Exchange Trading.
The e-books that are available to understand the Foreign Exchange more efficiently can typically be downloaded over the Internet, so you can most insolently begin almost as soon as you have paid your fees and downloaded the apropos files.
So no need of waiting for snail mail deliveries and you can begin immediately Foreign Exchange Trading soon. Some of the e-books and courses related to Foreign Trading will also include discounts and additional benefits when you sign up for an e-book or a course.
This combination can be of brilliant value when compared to some of the more long-established methods of learning the business of Foreign Exchange Trading.
Foreign Exchange rates refer to the amount of currency you obtain when you buy one currency with another currency. That is, it is most important to understand if you are traveling to England. In general, Foreign Exchange Trading if you or someone that understands and has expert knowledge live in approval of the United States, you then carry dollars.
You then ought to change these dollars for British Pounds and review the foreign currency rates to see how many US dollars it could take to buy one British Pound. Similarly, it would apply to every single country you might visit. Importers and exporters of goods are also concerned about the foreign currency rates.
The traders in Foreign Trading need foreign currency to make their business transactions. A buyer in England of United States goods watches the foreign currency rates to try and obtain a better price for the United States dollars they need to buy the United States goods.
During the Foreign Exchange Trading most foreign currency rates change all the time. The rates that do change on a daily or even hourly basis are called as the floating currencies. This means that market forces determine the price.
If more dollars are being bought and more British Pounds are being sold, the United States dollar then increases in value.
Thus, Foreign Exchange Trading should always be done keeping an alert eye on the Foreign Exchange Market.
A Synopsis of what it takes to trade the forex market with success
Lets start from the basics. The first thing someone needs is very good education. And this requires a lot of thorough research as there are many sources but not all are worth the money for their services. So in this sense an online forex course could be a good idea along with some books. But here comes the first major problem. Which course and which books, which aspects to cover? The technical analysis issue? The maxim goes with the trend? The candlesticks analysis? And which system to use and follow? There are thousands of them! So before we even begin a trader is confused. And confusion is a very bad enemy but it can be arranged. How it can be arranged? With some simple steps. Such as simplicity. The more you know the better chances you have to succeed trading forex and it all comes down to probabilities.
Education is a must to all trading aspects from stocks to futures to forex. But forex has two unique features. High liquidity and extremely high leverage. And although the liquidity is a very good feature high leverage is not. At least not until you know what you are doing. Here we focus again on education. Besides a participation in a forex course either online or not, an amount that will be put away as an investment for education is the first thing a trader must do. Some ideas are to focus on analyzing the current conditions of the market and to have a bias for a specific currency pair. A system such as following the trend could be the core of a trading strategy. And a demo account with many virtual trades as many as possible for a long period of time is the next step.
Now the most important part of the trading action is to make a plan, stick to it and apply very strict money management rules because if the capital is finished and it very easy this to happen then our trading career will finish within a few days, months or even hours.
Lets face the truth that trading is not easy. It is unfortunately far easier for someone to lose all his account rather than make wild profits beyond each expectation. That is because emotions and psychology are very crucial for success. Some of the most important emotions are fear, uncertainty, euphoria and revenge. Revenge comes into play very often as when someone loses an amount wants desperately to get it back and often the outcome is that more loses come simply because the trader is on the wrong side of the trend!
Discipline and patience are virtues that distinguish a good trader from a mediocre trader. Without specific goals and a written procedure a trader is like a cargo ship that has sailed without any destination. Someday the fuel will be exhausted and many dangers from the weather to the potential physical damages may happen. Risks exist all the time. The point is how to deal with them.
One of the most useful phrases is taken from the movie Forrest Gump.Life is like a box of chocolates, you never know what you going to get!
It is true. Be as prepared as possible. Do not let the brokers excite you promising very high returns and extremely high leverage? Do some very thorough research before opening an account funded with real money. Compare the bid-ask spreads and technical support to name only a few aspects.
Be very skeptical to previous results as offered from many signal services. The major aim should be to learn to trade and make your own decisions and not blindly follow some others decisions and opinions. Confidence and experience come with the passage of time.
So we mentioned simplicity before. Being realistic and having a controlled life balance is very important. One major goal should be consistency so as to have the ability to make profits each month and keep them.
Fundamental news is another important issue and in essence the technical analysis is the mirror of fundamentals. Expectations change rapidly and emotions also. And if you think about it emotions and expectations mainly move the forex market. Most times like the recent Fed rate hike decision a move is under way but the danger is when it will be finished and certainly not getting in at the wrong time after all the move is completed.
The best approach for a trader would be to set specific goals and if achieved then stop trading. The worst idea is to trade in a choppy market where random noise will make it difficult to get specific profits.
So a tested system with very precise rules such as entering exiting and having stop-loss orders may not be a holly grail but is surely one very good approach to start with and focus on it. Pivot points are such a system. At least it is a good start. They encompass education, discipline, strict criteria, and targets and are a proven system that major players use. They are not foolproof always as nothing is certain but they deal with high probabilities and this is very important.
Also a very practical way is to act as organizes as possible. Meaning that:
1.Develop your own trading journal where you will be writing down your trades and a brief explanation of what made you place a particular trade so as to evaluate performance. Note each day the major economic releases if any because it is often wise to be out of the market before the release of the news and trade only after having a much clearer opinion of what price action may be. Remember it is all about high probabilities.
2.A risk/reward ratio of 1:2 meaning that you risk an amount to get at least the twice if all go well is suggested but sometimes it is best to be conservative and even apply an 1:1 ratio by applying very strict risk management risking no more than 2-3% of total capital per trade. Survival is everything.
3.It would be a good idea from time to time to have breaks from trading. Opportunities exist always so stopping trading when losses of 10-20% maximum of trading capital have accumulated is a good way to revaluate what is going on before a large amount of capital is lost. Trading is not gambling it is a way of investment. The philosophy should be to define realistic goals such as a number of pips per day and if achieved then stop trading. Greed is another bad enemy of traders. On the contrary the notion of compounding profits and retiring a portion of them each month is a good way to build a solid account and keep monitoring its growth.
So in this first article we touched briefly many ideas from education to psychology to a proven trading system etc. Each idea will have more in depth analysis in the very near future. Your comments and suggestions will help us a lot to focus on what you need or want to analyze. Above all interactive communication brings the best results.
Education is a must to all trading aspects from stocks to futures to forex. But forex has two unique features. High liquidity and extremely high leverage. And although the liquidity is a very good feature high leverage is not. At least not until you know what you are doing. Here we focus again on education. Besides a participation in a forex course either online or not, an amount that will be put away as an investment for education is the first thing a trader must do. Some ideas are to focus on analyzing the current conditions of the market and to have a bias for a specific currency pair. A system such as following the trend could be the core of a trading strategy. And a demo account with many virtual trades as many as possible for a long period of time is the next step.
Now the most important part of the trading action is to make a plan, stick to it and apply very strict money management rules because if the capital is finished and it very easy this to happen then our trading career will finish within a few days, months or even hours.
Lets face the truth that trading is not easy. It is unfortunately far easier for someone to lose all his account rather than make wild profits beyond each expectation. That is because emotions and psychology are very crucial for success. Some of the most important emotions are fear, uncertainty, euphoria and revenge. Revenge comes into play very often as when someone loses an amount wants desperately to get it back and often the outcome is that more loses come simply because the trader is on the wrong side of the trend!
Discipline and patience are virtues that distinguish a good trader from a mediocre trader. Without specific goals and a written procedure a trader is like a cargo ship that has sailed without any destination. Someday the fuel will be exhausted and many dangers from the weather to the potential physical damages may happen. Risks exist all the time. The point is how to deal with them.
One of the most useful phrases is taken from the movie Forrest Gump.Life is like a box of chocolates, you never know what you going to get!
It is true. Be as prepared as possible. Do not let the brokers excite you promising very high returns and extremely high leverage? Do some very thorough research before opening an account funded with real money. Compare the bid-ask spreads and technical support to name only a few aspects.
Be very skeptical to previous results as offered from many signal services. The major aim should be to learn to trade and make your own decisions and not blindly follow some others decisions and opinions. Confidence and experience come with the passage of time.
So we mentioned simplicity before. Being realistic and having a controlled life balance is very important. One major goal should be consistency so as to have the ability to make profits each month and keep them.
Fundamental news is another important issue and in essence the technical analysis is the mirror of fundamentals. Expectations change rapidly and emotions also. And if you think about it emotions and expectations mainly move the forex market. Most times like the recent Fed rate hike decision a move is under way but the danger is when it will be finished and certainly not getting in at the wrong time after all the move is completed.
The best approach for a trader would be to set specific goals and if achieved then stop trading. The worst idea is to trade in a choppy market where random noise will make it difficult to get specific profits.
So a tested system with very precise rules such as entering exiting and having stop-loss orders may not be a holly grail but is surely one very good approach to start with and focus on it. Pivot points are such a system. At least it is a good start. They encompass education, discipline, strict criteria, and targets and are a proven system that major players use. They are not foolproof always as nothing is certain but they deal with high probabilities and this is very important.
Also a very practical way is to act as organizes as possible. Meaning that:
1.Develop your own trading journal where you will be writing down your trades and a brief explanation of what made you place a particular trade so as to evaluate performance. Note each day the major economic releases if any because it is often wise to be out of the market before the release of the news and trade only after having a much clearer opinion of what price action may be. Remember it is all about high probabilities.
2.A risk/reward ratio of 1:2 meaning that you risk an amount to get at least the twice if all go well is suggested but sometimes it is best to be conservative and even apply an 1:1 ratio by applying very strict risk management risking no more than 2-3% of total capital per trade. Survival is everything.
3.It would be a good idea from time to time to have breaks from trading. Opportunities exist always so stopping trading when losses of 10-20% maximum of trading capital have accumulated is a good way to revaluate what is going on before a large amount of capital is lost. Trading is not gambling it is a way of investment. The philosophy should be to define realistic goals such as a number of pips per day and if achieved then stop trading. Greed is another bad enemy of traders. On the contrary the notion of compounding profits and retiring a portion of them each month is a good way to build a solid account and keep monitoring its growth.
So in this first article we touched briefly many ideas from education to psychology to a proven trading system etc. Each idea will have more in depth analysis in the very near future. Your comments and suggestions will help us a lot to focus on what you need or want to analyze. Above all interactive communication brings the best results.
Foreign Exchange Rates
In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. For example an exchange rate of 123 Japanese yen (JPY, ¥) to the United States dollar (USD, $) means that JPY 123 is worth the same as USD 1. The foreign exchange market is one of the largest markets in the world. By some estimates, about 2 trillion USD worth of currency changes hands every day.The spot exchange rate refers to the current exchange rate. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date.
OANDA Foreign Exchange Rates (Foreign Exchange Converter - FXConverter)
FXConverter is a multilingual currency converter for over 164 currencies and 3 metals. It uses daily OANDA Rates®, the touchstone foreign exchange rates used by corporations, tax authorities, auditing firms, and financial institutions. These filtered rates are based on information supplied by leading market data contributors.
http://www.oanda.com/convert/classic
OANDA Foreign Exchange Rates (Foreign Exchange Converter - FXConverter)
FXConverter is a multilingual currency converter for over 164 currencies and 3 metals. It uses daily OANDA Rates®, the touchstone foreign exchange rates used by corporations, tax authorities, auditing firms, and financial institutions. These filtered rates are based on information supplied by leading market data contributors.
http://www.oanda.com/convert/classic
Wednesday, August 27, 2008
FOREX-Dollar slips against euro, oil, GSE worries weigh
TOKYO, Aug 28 (Reuters) - The dollar slipped from a six-month high against the euro on Thursday after comments by a European Central Bank official the previous day scaled back speculation about an ECB rate cut.
ECB Executive Board member Axel Weber, widely considered one of the most influential ECB policy-makers, told Bloomberg News that any talk about lower interest rates in the euro zone was premature.
A rise in oil prices also supported the euro while the dollar remained weighed down by troubles in the U.S. financial system, due to uncertainty over how housing finance firms Fannie Mae and Freddie Mac will be bailed out of the current crisis.
The euro's recovery helped limit yen gains against other currencies and kept the dollar in narrow ranges against the Japanese currency.
"Weber's comments were hawkish and the market now appears to be looking for reasons to push the euro higher, with an eye on upcoming euro zone data," said Hiroshi Yoshida, a trader at Shinkin Central Bank.
German unemployment data is due later in the day and euro zone consumer price data is due on Friday.
"Oil prices holding up is also positive for the euro, suggesting the euro may start to recover from recent selling," Yoshida said.
Market players barely reacted to a Japanese newspaper report which said the United States, Europe and Japan had planned to intervene and rescue a weak dollar in March. [ID:nN27489995]
Japan's top financial diplomat, Naoyuki Shinohara, said on Thursday he had no comment on the report and said there was no change in Japan's foreign exchange policy. [ID:nTKU003023]
Traders in Tokyo said the news itself will likely have little impact because conditions have changed and the dollar has rebounded significantly since then. But the report may stir expectations of intervention in the future if exchange rates reach extreme levels.
The euro was up 0.3 percent at $1.4763, recovering from a six-month low at $1.4570 hit on Tuesday.
The dollar eased 0.1 percent versus the yen to 109.40 yen.
The dollar also fell against a basket of six major currencies, retreating from this year's highs.
The dollar index, a measure of the greenback's value against six major currencies, fell 0.2 percent to 76.860 <.DXY>, having hit a 2008 high on Tuesday at 77.619.
Despite U.S. economic weakness, the dollar had been benefiting from growing signs since late July that economic weakness has spread beyond the Unites States.
With a deteriorating global economy, central banks in Britain and Australia are expected to lower rates at some point to help shield their economies from the threat of recession, while the Federal Reserve is widely seen holding rates steady for months.
A slew of weak euro zone economic data this week had fuelled expectations that the ECB's next move would be to cut rates, but with such views dimming after Weber, the dollar's advantage may also weaken, traders said.
ECB Executive Board member Axel Weber, widely considered one of the most influential ECB policy-makers, told Bloomberg News that any talk about lower interest rates in the euro zone was premature.
A rise in oil prices also supported the euro while the dollar remained weighed down by troubles in the U.S. financial system, due to uncertainty over how housing finance firms Fannie Mae
The euro's recovery helped limit yen gains against other currencies and kept the dollar in narrow ranges against the Japanese currency.
"Weber's comments were hawkish and the market now appears to be looking for reasons to push the euro higher, with an eye on upcoming euro zone data," said Hiroshi Yoshida, a trader at Shinkin Central Bank.
German unemployment data is due later in the day and euro zone consumer price data is due on Friday.
"Oil prices holding up is also positive for the euro, suggesting the euro may start to recover from recent selling," Yoshida said.
Market players barely reacted to a Japanese newspaper report which said the United States, Europe and Japan had planned to intervene and rescue a weak dollar in March. [ID:nN27489995]
Japan's top financial diplomat, Naoyuki Shinohara, said on Thursday he had no comment on the report and said there was no change in Japan's foreign exchange policy. [ID:nTKU003023]
Traders in Tokyo said the news itself will likely have little impact because conditions have changed and the dollar has rebounded significantly since then. But the report may stir expectations of intervention in the future if exchange rates reach extreme levels.
The euro was up 0.3 percent at $1.4763
The dollar eased 0.1 percent versus the yen to 109.40 yen
The dollar also fell against a basket of six major currencies, retreating from this year's highs.
The dollar index, a measure of the greenback's value against six major currencies, fell 0.2 percent to 76.860 <.DXY>, having hit a 2008 high on Tuesday at 77.619.
Despite U.S. economic weakness, the dollar had been benefiting from growing signs since late July that economic weakness has spread beyond the Unites States.
With a deteriorating global economy, central banks in Britain and Australia are expected to lower rates at some point to help shield their economies from the threat of recession, while the Federal Reserve is widely seen holding rates steady for months.
A slew of weak euro zone economic data this week had fuelled expectations that the ECB's next move would be to cut rates, but with such views dimming after Weber, the dollar's advantage may also weaken, traders said.
Monday, August 25, 2008
Best Forex Trading Book
Book Description The first plain-English introduction to foreign currency exchange trading--one of today's hottest profit opportunities The foreign currency market is the largest financial market in the world, and foreign exchange trading is quickly becoming one of today's most high-profile, potentially ...
"For many investors, an intense, 24-hour-a-day, $1.5 trillion roller-coaster of a market spells "danger"; for readers of Forex Revolution, the word is "opportunity." —Michael J. Panzner, vice president, Rabo Securities USA, Inc., and author of The New Laws of the Stock
Bill Williams' pioneering application of chaos theory to the financial markets is leading technical analysis into the twenty-first century and beyond. New Trading Dimensions presents a complete, highly original, and intriguing trading method with clear, detailed illustrations, and challenging practice pages. Bill's wisdom, technical expertise, and skillful teaching style make this a revolutionary must-have new book for stock and commodity traders." —Tom Bierovic, Product Manager for User Education, Omega Research, Inc.o
"For many investors, an intense, 24-hour-a-day, $1.5 trillion roller-coaster of a market spells "danger"; for readers of Forex Revolution, the word is "opportunity." —Michael J. Panzner, vice president, Rabo Securities USA, Inc., and author of The New Laws of the Stock
Bill Williams' pioneering application of chaos theory to the financial markets is leading technical analysis into the twenty-first century and beyond. New Trading Dimensions presents a complete, highly original, and intriguing trading method with clear, detailed illustrations, and challenging practice pages. Bill's wisdom, technical expertise, and skillful teaching style make this a revolutionary must-have new book for stock and commodity traders." —Tom Bierovic, Product Manager for User Education, Omega Research, Inc.o
How do margin calls work?
A margin call is generated when the equity balance in an account drops below the margin requirement for that size account. If the maximum allowable leverage has been exceeded, any open positions are immediately liquidated, regardless of the nature or size of the positions.
How often can trades be made?
As one might expect, trading activity on any particular day is dictated by current market conditions. Some small to medium size traders might make as many as 10 transactions in a day. By not charging commission and offering tight spreads, Forex Capital Management investors can take positions as often as is necessary without concern for excessive transaction costs.
How long should a position be maintained?
Forex traders generally hold positions until one of three criteria is met:
1. A sufficient profit has been realized from the position.
2. A pre-set stop-loss order is triggered.
3. A better potential position emerges and the trader needs to liquidate funds to take advantage of it.
1. A sufficient profit has been realized from the position.
2. A pre-set stop-loss order is triggered.
3. A better potential position emerges and the trader needs to liquidate funds to take advantage of it.
What trading strategy should I use?
Both economic fundamentals and technical factors influence the decisions of currency traders. Those who follow economic fundamentals use government issued reports, current news, and broad economic trends to anticipate movements in price. Technical traders rely on trend lines, support and resistance levels, and a variety of charts and mathematical analysis to identify trading opportunities. Over time, the most significant price movements occur in close association with unexpected events. Perhaps the central bank changes rates without warning, or an election puts an unexpected candidate in power. News from conflicts certainly impacts currency pricing. More often than not, it is the expectation of a certain event rather than the actual event that drives price pressures.
How can I manage risk?
The most common risk management tools in Forex trading are the stop-loss order and the limit order. The stop-loss order directs that a position be automatically liquidated at a certain price in order to guard against dramatic changes against the position. A limit order sets the maximum price that the investor is willing to pay in a transaction, as well as a minimum price to be received in exchange. The foreign exchange marketplace is so liquid that it is easy to execute stop-loss and limit orders. Forex Capital Management guarantees execution of stop-loss and limit orders at the specified price on orders up to US$1 million.
How is pricing determined for certain currencies?
The full range of economic and political conditions impact currency pricing. It is generally held that interest rates, inflation rates and political stability are top among important factors. At times, governments participate in the forex market in order to influence the traded value of their currencies. These and other market factors such as very large orders can cause extreme relative volatility in currency prices. The sheer size of the forex market prevents any single factor from dominating the market for any length of time.
What is the difference between an "intraday" and "overnight position"?
Intraday positions are all positions opened anytime during the 24 hour period AFTER the close of Forex Capital’s normal trading hours at 5:00pm EST. Overnight positions are positions that are still on at the end of normal trading hours (5:00pm EST), which are automatically rolled by Forex Capital Management.
What are “short” and “long” positions?
Short positions are taken when a trader sells currency in anticipation of a downturn in price. Making this move allows the investor to benefit from a decline. Long positions are taken when a trader buys a currency at a low price in anticipation of selling it later for more. Making these moves allows the investor to benefit from changing market prices. Remember! Since currencies are traded in pairs, every forex position inevitably requires the investor to go short in one currency and long in the other.
What is Margin?
Margin is a performance bond that insures against trading losses. Margin requirements in the FX marketplace allow you to hold positions much larger than the asset value of your account. Trading with Forex Capital Management includes a pre-trade check for margin availability, the trade is executed only if there are sufficient margin funds in your account. The Forex Capital Management trading system calculates cash on hand necessary to cover current positions, and provides this information to you in real time. If funds in your account fall below margin requirements, the system will close all open positions. This prevents your account from falling below your available equity, which is a key protection in this volatile, fast moving marketplace.
Is is capital intensive to trade forex?
Forex Capital Management requires a minimum deposit of $300 to open a Mini Account and $2000 for a regular account. Your relationship with Forex Capital Management enables you to conduct highly leveraged trades (as much as a 200 to 1 leverage ration in the Mini Account.) You set the degree of leverage that you wish to deploy. Unless otherwise specified, your leverage level is set at the most lenient level required by your account size. Please remember that while this degree of leverage enables you to maximize your profit potential, there is an equally great potential for loss.
Who participates in the FX market?
Central, commercial and investment banks have traditionally dominated the Forex market. Other market participation is rapidly increasing, and now includes international money managers and brokers, multinational corporations, registered dealers, options and futures traders, and private investors.
What are the most common currencies in the Forex markets?
The most “liquid” currencies in the Forex market are those of countries with low inflation, stable governments, and respected central banks. Nearly 85% of daily transactions involve the major currencies, including the U.S. Dollar, Japanese Yen, the European Union Euro, British Pound, Swiss Franc, and the Canadian and Australian Dollars.
When is the FX market open for trading?
Forex is a true global 24-hour marketplace. The trading day begins in Sydney, and moves around the globe as each financial center comes to life. Tokyo follows, then London, and finally New York. Investors can respond in real time to any fluctuations caused by current economic, social and political events.
Is there a central location for the Forex Market?
Forex trading is not managed through an exchange. Since transactions are conducted between two counterparts, the FX market is an “inter-bank,” or over the counter (OTC) market.
What is Foreign Exchange / Forex / FX?
Foreign exchange is the simultaneous purchase of one currency and sale of another – currencies are always traded in pairs. International currencies are traded on floating exchange rates. There is a daily average turnover of about US$1.5 trillion in the foreign exchange markets. The foreign exchange market is known as the "Forex," or "FX" market. It is the largest financial market in the world.
Forex Software
Forex trading software helps investors working in the sometimes complicated area of foreign exchange transactions and should be looked at by all serious investors.
Using the older methods of reading hard copy newsletters, magazines and books worked well during its day and age, but today decisions need to be made quickly, and having access to up to date information and the ability to make a trade quickly is something that forex trading software offers the investor and it greatly increases the ability of an investor trader to work the market resulting in profit.
For the investor who is interested in acquiring forex trading software there are many good options. Checking with a financial advisor you trust to see what forex trading software he or she recommends can be a good place to start. Also going online and doing a web search of forex trading software can show many programs available.
Many people when going online will log onto message forums or join online groups that discuss forex trading and see what other traders like to use. Simply posting a message on the group asking what forex trading software is poplar and what the advantages and disadvantages of each program are can add to a person’s knowledge base and allow him or her to make a good decision when purchasing forex trading software.
Remember also that some specific forex trading software programs are available for short free trial periods. Experimenting with several programs will help an investor make a decision as to which forex trading software will offer the options and ease of use desired. This try it before you buy it approach will help a person avoid decisions that might be regretted later
.If, as an investor, you are using one of the many reliable online trading systems, the company that you are working through may have forex trading software they can furnish you. Often this is available for quick and easy download to your home computer and is already set up for optimum operation with the system with which you are working.
If your company does not provide forex trading software they probably have programs that they can recommend, that they and their members have had good luck with in the past. Always ask what forex trading software they recommend before making a purchase.Since the companies that manufacture and market forex trading software are competing for your business their advertisements and websites will list many of the positive features of their product.
They often offer free e-books or free e-zines that provide information on forex trading. If a company is able to provide you with this information take a close and serious look at what they are offering. Consider this a part of your forex trading education, and learn from it. Use it as a way to add to your personal knowledge base and you’ll benefit.
Remember that the many choices of forex trading software are there because individuals involved in forex trading have different needs and different preferences, so learning all you can about a program, and about the forex trading market itself before buying will always pay off.
Using the older methods of reading hard copy newsletters, magazines and books worked well during its day and age, but today decisions need to be made quickly, and having access to up to date information and the ability to make a trade quickly is something that forex trading software offers the investor and it greatly increases the ability of an investor trader to work the market resulting in profit.
For the investor who is interested in acquiring forex trading software there are many good options. Checking with a financial advisor you trust to see what forex trading software he or she recommends can be a good place to start. Also going online and doing a web search of forex trading software can show many programs available.
Many people when going online will log onto message forums or join online groups that discuss forex trading and see what other traders like to use. Simply posting a message on the group asking what forex trading software is poplar and what the advantages and disadvantages of each program are can add to a person’s knowledge base and allow him or her to make a good decision when purchasing forex trading software.
Remember also that some specific forex trading software programs are available for short free trial periods. Experimenting with several programs will help an investor make a decision as to which forex trading software will offer the options and ease of use desired. This try it before you buy it approach will help a person avoid decisions that might be regretted later
.If, as an investor, you are using one of the many reliable online trading systems, the company that you are working through may have forex trading software they can furnish you. Often this is available for quick and easy download to your home computer and is already set up for optimum operation with the system with which you are working.
If your company does not provide forex trading software they probably have programs that they can recommend, that they and their members have had good luck with in the past. Always ask what forex trading software they recommend before making a purchase.Since the companies that manufacture and market forex trading software are competing for your business their advertisements and websites will list many of the positive features of their product.
They often offer free e-books or free e-zines that provide information on forex trading. If a company is able to provide you with this information take a close and serious look at what they are offering. Consider this a part of your forex trading education, and learn from it. Use it as a way to add to your personal knowledge base and you’ll benefit.
Remember that the many choices of forex trading software are there because individuals involved in forex trading have different needs and different preferences, so learning all you can about a program, and about the forex trading market itself before buying will always pay off.
WHAT IS FOREX CURRENCY TRADING?
If you read about investing, you've seen the word forex trading. But because forex doesn't get much publicity in the major publications and websites, many investors don't know that forex is just short for "foreign exchange". So trading the forex market is simply trading foreign currencies.
As recently as ten years ago, currency trading had high barriers to entry, so only large banking and institutional firms had access to the tools and systems required to play in the forex trading game. Recently, however, technology has developed to the point that any individual investor can hop right in and trade with one of the many online platforms.
When buying and selling in the forex currency trading system market, you'll see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.
he goal when investing in currency is to be holding a currency that appreciates in value in relation to the other currencies. To use an overly simplistic example, if you bought 50 British Pounds for 100 US Dollars, held the Pounds for 1 week, and in that period the value of Pounds increased in relation to US Dollars, you could then convert those Pounds back into dollars for, say, $120.
Unlike the domestic stock markets, the forex currency trading is open for trades 24 hours a day. Much like the phrase "it's always noon somewhere," it's always business hours at some region of the globe. Since every country trades on the FX market, and it's open all day, the daily volume is roughly $1.2 trillion, which dwarfs that of the NYSE. Another comparison to make in order to truly realize the magnitude of the forex market is with the currency futures market (which has around 1% of the daily volume).
One other important distinction to make is that forex currency trading is not centered on an exchange like the NYSE or NASDAQ. There is no central body or organization required to act as middleman. Trading circulates between major banking centers around the world.
Until recently, there were strict financial requirements and massive minimum transaction sizes which prevented individual investors from trading. But with the advent of the internet came the FX brokers. A forex currency broker is similar to an online stock trading account such as etrade.
Anybody can open an account and buy and sell in any quantity. Because the brokers have thousands of investors placing orders through them, they are able to meet the large minimum transaction size by purchasing in large blocks and distributing currency amongst the purchasing investors.
Although it is now easy to start trading forex, it is a complicated and complex market. While it offers fantastic opportunity for wealth, it is also very easy to lose your shirt in a hurry. Before trading forex, do your homework and read as much as you can find before investing your hard earned money.
As recently as ten years ago, currency trading had high barriers to entry, so only large banking and institutional firms had access to the tools and systems required to play in the forex trading game. Recently, however, technology has developed to the point that any individual investor can hop right in and trade with one of the many online platforms.
When buying and selling in the forex currency trading system market, you'll see that there are four "currency pairs" that dominate the percentage of trades. Those four are the Euro vs U.S. Dollar, US Dollar vs Japanese Yen, US Dollar vs Swiss Franc, and US Dollar vs British Pound.
he goal when investing in currency is to be holding a currency that appreciates in value in relation to the other currencies. To use an overly simplistic example, if you bought 50 British Pounds for 100 US Dollars, held the Pounds for 1 week, and in that period the value of Pounds increased in relation to US Dollars, you could then convert those Pounds back into dollars for, say, $120.
Unlike the domestic stock markets, the forex currency trading is open for trades 24 hours a day. Much like the phrase "it's always noon somewhere," it's always business hours at some region of the globe. Since every country trades on the FX market, and it's open all day, the daily volume is roughly $1.2 trillion, which dwarfs that of the NYSE. Another comparison to make in order to truly realize the magnitude of the forex market is with the currency futures market (which has around 1% of the daily volume).
One other important distinction to make is that forex currency trading is not centered on an exchange like the NYSE or NASDAQ. There is no central body or organization required to act as middleman. Trading circulates between major banking centers around the world.
Until recently, there were strict financial requirements and massive minimum transaction sizes which prevented individual investors from trading. But with the advent of the internet came the FX brokers. A forex currency broker is similar to an online stock trading account such as etrade.
Anybody can open an account and buy and sell in any quantity. Because the brokers have thousands of investors placing orders through them, they are able to meet the large minimum transaction size by purchasing in large blocks and distributing currency amongst the purchasing investors.
Although it is now easy to start trading forex, it is a complicated and complex market. While it offers fantastic opportunity for wealth, it is also very easy to lose your shirt in a hurry. Before trading forex, do your homework and read as much as you can find before investing your hard earned money.
British Pound Speculative Shorts (COT) Highest on Record
According to the most recent COT numbers, US dollar bullish sentiment is at an extreme, which makes the buck vulnerable to a sharp decline in the weeks ahead. Notably, the difference between speculative and commercial positions for the British Pound is the greatest it has ever been. This is the kind of dynamic we would expect to see at a turning point.
Latest CFTC Release Dated August 19, 2008:
Discuss Trader Sentiment and Positioning at the DailyFX Forum
08-25-08cot1
The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).
Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.
Latest CFTC Release Dated August 19, 2008:
Discuss Trader Sentiment and Positioning at the DailyFX Forum
08-25-08cot1
The COT Index is the percentile of the difference between net speculative positioning and net commercial positioning measured over a specific number of weeks (either 52 or 13). A reading close to 0 suggests that a bottom is forming and a reading close to 100 suggests that a top is forming. The readings are for the actual currency, not the currency pair. For example, a reading of 100 on the Canadian Dollar suggests that the Canadian Dollar is close to a top (USDCAD close to a bottom).
Readings of 95 and higher as well as 5 and lower are in boldfaced red type to indicate potential market extremes. For example, an increasing index is bullish until the index is extreme (near 100), at which time the risk of a reversal or pause in the trend increases.
US Economic Indicators: DJ Survey Of Forecasters-Aug 25
Forecasts based on the projections from 20 economists as of Friday,
Aug 22. NA = not available. E = estimate. R = revised. **** = tentative.
Time --Forecast--
Date EDT Indicators Median Low High Prev Actual
08/25 :1000: Jul Existing Home Sales : 4.92 4.80 5.00: 4.85R: 5.00
08/25 :1000: % change : : -2.8R: 3.1
08/26 :1000: Jul S/F Home Sales : 520 500 540: 530 :
08/26 :1000: Aug Consumer Confidence : 53.5 52.0 55.0: 51.9 :
08/26 :1000: Jul Preliminary Steel Impo: NA NA NA : 9.1% :
08/27 :0830: Jul Durable Goods (% chg) : -0.4 -1.0 0.3: 0.8 :
08/28 :0830: Unemploy Clms p/e Aug 23 : 420 325 430: 432 :
08/28 :0830: Q2 Pre GDP : 2.7 2.5 3.0: 1.9
08/28 :0830: Final Sales Dom Prchsr : NA NA NA : 5.0 :
08/28 :0830: PCE Defltr : 0.3 0.2 0.3: 1.5 :
08/28 :0830: Price Defltr : NA NA NA : 1.1 :
08/28 :0830: Q2 Pre Corp Profits : : 2.5 :
08/29 :0830: Jul Personal Inc (% chg) : -0.4 -1.0 0.1: 0.1 :
08/29 :0830: PCE (% chg) : 0.2 0.2 0.3: 0.6 :
09/02 :1000: Aug ISM : NA NA NA : 50.0 :
09/02 :1000: Employment : : 51.9 :
09/02 :1000: Prices : NA NA NA : 88.5 :
09/02 :1000: Jul Constrcn Spdg(% chg) : NA NA NA : -0.4 :
09/03 :1000: Jul Factory Ord (% chg) : NA NA NA : 1.7 :
09/04 :0830: Q2 Fin Productivity : NA NA NA : 2.3 :
09/04 :0830: Unit Labor Costs : NA NA NA : 1.5 :
09/05 :0830: Aug Jobless Rate : NA NA NA : 5.7 :
09/05 :0830: Jobs (chg) : NA NA NA : -51 :
09/05 :0830: Private (chg) : : -76 :
09/05 :0830: Manufac (chg) : NA NA NA : -35 :
09/05 :0830: Avg Hourly (% chg) : NA NA NA : 0.3 :
09/08 :1500: Jul Consumr Crdt (bln$) : NA NA NA : 14.3 :
09/11 :0830: Jul Trade Balance : NA NA NA : -56.8 :
09/11 :0830: Goods Total : NA NA NA : -70.0 :
09/11 :1400: Aug Treasury Budget Stmt : NA NA NA : -102.8 :
09/12 :0830: Aug Retail Sales (% chg) : NA NA NA : -0.1 :
09/12 :0830: Ex-Auto (% chg) : NA NA NA : 0.4 :
09/12 :0830: Aug PPI (% chg) : NA NA NA : 1.2 :
09/12 :0830: PPI Core (% chg) : NA NA NA : 0.7 :
09/12 :1000: Jul Busin Invty (% chg) : NA NA NA : 0.7 :
09/15 :0915: Aug Industl Prod (% chg) : NA NA NA : 0.2 :
09/15 :0915: Capacty Util : NA NA NA : 79.9 :
09/16 :0830: Aug CPI (% chg) : NA NA NA : 0.8 :
09/16 :0830: CPI Core (% chg) : NA NA NA : 0.3 :
09/17 :0830: Aug Housing Starts : NA NA NA : 0.965 :
09/17 :0830: % change : : -11.0 :
09/17 :0830: Housing Permits : NA NA NA : 0.937 :
09/17 :0830: % change : : -17.7 :
09/18 :1000: Aug LEI (% chg) : NA NA NA : -0.7 :
10/31 :0830: Q3 07 ECI : NA NA NA : 0.7 :
10/31 :0830: ECI Annual : NA NA NA : 3.1 :
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed stories:
84698 US Economic Indicators: Latest 6 months data
80055-57 US Economic Calendar
Aug 22. NA = not available. E = estimate. R = revised. **** = tentative.
Time --Forecast--
Date EDT Indicators Median Low High Prev Actual
08/25 :1000: Jul Existing Home Sales : 4.92 4.80 5.00: 4.85R: 5.00
08/25 :1000: % change : : -2.8R: 3.1
08/26 :1000: Jul S/F Home Sales : 520 500 540: 530 :
08/26 :1000: Aug Consumer Confidence : 53.5 52.0 55.0: 51.9 :
08/26 :1000: Jul Preliminary Steel Impo: NA NA NA : 9.1% :
08/27 :0830: Jul Durable Goods (% chg) : -0.4 -1.0 0.3: 0.8 :
08/28 :0830: Unemploy Clms p/e Aug 23 : 420 325 430: 432 :
08/28 :0830: Q2 Pre GDP : 2.7 2.5 3.0: 1.9
08/28 :0830: Final Sales Dom Prchsr : NA NA NA : 5.0 :
08/28 :0830: PCE Defltr : 0.3 0.2 0.3: 1.5 :
08/28 :0830: Price Defltr : NA NA NA : 1.1 :
08/28 :0830: Q2 Pre Corp Profits : : 2.5 :
08/29 :0830: Jul Personal Inc (% chg) : -0.4 -1.0 0.1: 0.1 :
08/29 :0830: PCE (% chg) : 0.2 0.2 0.3: 0.6 :
09/02 :1000: Aug ISM : NA NA NA : 50.0 :
09/02 :1000: Employment : : 51.9 :
09/02 :1000: Prices : NA NA NA : 88.5 :
09/02 :1000: Jul Constrcn Spdg(% chg) : NA NA NA : -0.4 :
09/03 :1000: Jul Factory Ord (% chg) : NA NA NA : 1.7 :
09/04 :0830: Q2 Fin Productivity : NA NA NA : 2.3 :
09/04 :0830: Unit Labor Costs : NA NA NA : 1.5 :
09/05 :0830: Aug Jobless Rate : NA NA NA : 5.7 :
09/05 :0830: Jobs (chg) : NA NA NA : -51 :
09/05 :0830: Private (chg) : : -76 :
09/05 :0830: Manufac (chg) : NA NA NA : -35 :
09/05 :0830: Avg Hourly (% chg) : NA NA NA : 0.3 :
09/08 :1500: Jul Consumr Crdt (bln$) : NA NA NA : 14.3 :
09/11 :0830: Jul Trade Balance : NA NA NA : -56.8 :
09/11 :0830: Goods Total : NA NA NA : -70.0 :
09/11 :1400: Aug Treasury Budget Stmt : NA NA NA : -102.8 :
09/12 :0830: Aug Retail Sales (% chg) : NA NA NA : -0.1 :
09/12 :0830: Ex-Auto (% chg) : NA NA NA : 0.4 :
09/12 :0830: Aug PPI (% chg) : NA NA NA : 1.2 :
09/12 :0830: PPI Core (% chg) : NA NA NA : 0.7 :
09/12 :1000: Jul Busin Invty (% chg) : NA NA NA : 0.7 :
09/15 :0915: Aug Industl Prod (% chg) : NA NA NA : 0.2 :
09/15 :0915: Capacty Util : NA NA NA : 79.9 :
09/16 :0830: Aug CPI (% chg) : NA NA NA : 0.8 :
09/16 :0830: CPI Core (% chg) : NA NA NA : 0.3 :
09/17 :0830: Aug Housing Starts : NA NA NA : 0.965 :
09/17 :0830: % change : : -11.0 :
09/17 :0830: Housing Permits : NA NA NA : 0.937 :
09/17 :0830: % change : : -17.7 :
09/18 :1000: Aug LEI (% chg) : NA NA NA : -0.7 :
10/31 :0830: Q3 07 ECI : NA NA NA : 0.7 :
10/31 :0830: ECI Annual : NA NA NA : 3.1 :
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed stories:
84698 US Economic Indicators: Latest 6 months data
80055-57 US Economic Calendar
US ECONOMIC INDICATORS: Housing Data, Latest 6 Months
Data seasonally adjusted except actual, which is not seasonaly adjusted.
Median and average prices for existing and single family homes in dollars.
Housing construction and homes sold in 1,000 units. R = revised.
(*) data reflect the increase in the universe of permits-issuing places
from 19,000 to 20,000 places. tbr = To Be Released.
HOUSING CONSTRUCTIO Jul Jun May Apr Mar Feb
Housing Starts 1,066 : 1,066R: 977R: 1,004 : 988 : 1,107
% change 0.0 : 9.1R: -2.7R: 1.6 : -10.7 : 4.0
Actual (NSA) 99.7 : 99.7R: 91.2R: 89.5 : 82.2 : 78.4
% change 0.0 : 9.3R: 1.9R: 8.9 : 4.8 : 10.7
Permits Issued(*) 1,138 : 1,138 : 978 : 982 : 932 : 981
% change 0.0 : 16.4 : -0.4 : 5.4 : -5.0 : -6.7
Actual (NSA) 108.1 : 108.1 : 90.3 : 89.5 : 77.4 : 73.4
% change 0.0 : 19.7 : 0.9 : 15.6 : 5.4 : -3.3
Units Completed 1,167 : 1,167R: 1,153R: 1,033 : 1,192 : 1,251
% change 0.0 : 1.2R: 11.6R: -13.3 : -4.7 : -6.0
Actual (NSA) 102.3 : 102.3R: 96.8R: 79.6 : 89.8 : 87.0
% change 0.0 : 5.7R: 21.6R: -11.4 : 3.2 : -7.0
Under Constr 965 : 965R: 983R: 1,006 : 1,013 : 1,024
% change 0.0 : -1.8R: -2.3R: -0.7 : -1.1 : -1.0
Actual (NSA) 977.8 : 977.8R: 990.3R: 999.9 : 988.6 : 989.6
% change 0.0 : -1.3R: -1.0R: 1.1 : -0.1 : -1.3
EXISTING HOME SALES Jul Jun May Apr Mar Feb
Total Homes Sold 5,000 : 4,850R: 4,990 : 4,890 : 4,940 : 5,030
% change 3.1 : -2.8R: 2.0 : -1.0 : -1.8 : 2.9
Median Prices 212.4 : 215.1R: 207.9 : 201.2 : 200.1 : 195.6
Average Prices 254.0 : 257.9R: 252.6 : 247.2 : 247.1 : 242.0
S/F Homes Sold 4,390 : 4,260R: 4,410 : 4,340 : 4,360 : 4,470
% change 3.1 : -3.4R: 1.6 : -0.5 : -2.5 : 2.8
Median Prices 210.9 : 213.6R: 206.0 : 199.6 : 197.6 : 193.6
Average Prices 252.9 : 256.8R: 251.2 : 246.2 : 245.4 : 240.7
NEW S/F HOMES Jul Jun May Apr Mar Feb
Homes Sold tbr : 530 : 533R: 542R: 513R: 572
% change tbr : -0.6 : -1.7R: 5.7R: -10.3R: -4.2
Actual (NSA) tbr : 49 : 51R: 49R: 49R: 48
% change tbr : -3.9 : 4.1R: 0.0R: 2.1R: 9.1
Median Prices tbr : 230.9 : 227.7R: 243.4R: 229.3R: 245.3
Average Prices tbr : 298.6 : 298.9R: 314.1R: 287.6R: 301.2
FHLB Jul Jun May Apr Mar Feb
Avg Arm Rate tbr : 6.23 : 6.04 : 5.97 : 6.03 : 5.87
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed story numbers:
84697 US ECONOMIC INDICATORS: FWN Survey of Forecasters (STATS)
84698 US ECONOMIC INDICATORS: Latest 6 months (STATS)
80055-57 US MONTHLY ECONOMIC CALENDAR
Median and average prices for existing and single family homes in dollars.
Housing construction and homes sold in 1,000 units. R = revised.
(*) data reflect the increase in the universe of permits-issuing places
from 19,000 to 20,000 places. tbr = To Be Released.
HOUSING CONSTRUCTIO Jul Jun May Apr Mar Feb
Housing Starts 1,066 : 1,066R: 977R: 1,004 : 988 : 1,107
% change 0.0 : 9.1R: -2.7R: 1.6 : -10.7 : 4.0
Actual (NSA) 99.7 : 99.7R: 91.2R: 89.5 : 82.2 : 78.4
% change 0.0 : 9.3R: 1.9R: 8.9 : 4.8 : 10.7
Permits Issued(*) 1,138 : 1,138 : 978 : 982 : 932 : 981
% change 0.0 : 16.4 : -0.4 : 5.4 : -5.0 : -6.7
Actual (NSA) 108.1 : 108.1 : 90.3 : 89.5 : 77.4 : 73.4
% change 0.0 : 19.7 : 0.9 : 15.6 : 5.4 : -3.3
Units Completed 1,167 : 1,167R: 1,153R: 1,033 : 1,192 : 1,251
% change 0.0 : 1.2R: 11.6R: -13.3 : -4.7 : -6.0
Actual (NSA) 102.3 : 102.3R: 96.8R: 79.6 : 89.8 : 87.0
% change 0.0 : 5.7R: 21.6R: -11.4 : 3.2 : -7.0
Under Constr 965 : 965R: 983R: 1,006 : 1,013 : 1,024
% change 0.0 : -1.8R: -2.3R: -0.7 : -1.1 : -1.0
Actual (NSA) 977.8 : 977.8R: 990.3R: 999.9 : 988.6 : 989.6
% change 0.0 : -1.3R: -1.0R: 1.1 : -0.1 : -1.3
EXISTING HOME SALES Jul Jun May Apr Mar Feb
Total Homes Sold 5,000 : 4,850R: 4,990 : 4,890 : 4,940 : 5,030
% change 3.1 : -2.8R: 2.0 : -1.0 : -1.8 : 2.9
Median Prices 212.4 : 215.1R: 207.9 : 201.2 : 200.1 : 195.6
Average Prices 254.0 : 257.9R: 252.6 : 247.2 : 247.1 : 242.0
S/F Homes Sold 4,390 : 4,260R: 4,410 : 4,340 : 4,360 : 4,470
% change 3.1 : -3.4R: 1.6 : -0.5 : -2.5 : 2.8
Median Prices 210.9 : 213.6R: 206.0 : 199.6 : 197.6 : 193.6
Average Prices 252.9 : 256.8R: 251.2 : 246.2 : 245.4 : 240.7
NEW S/F HOMES Jul Jun May Apr Mar Feb
Homes Sold tbr : 530 : 533R: 542R: 513R: 572
% change tbr : -0.6 : -1.7R: 5.7R: -10.3R: -4.2
Actual (NSA) tbr : 49 : 51R: 49R: 49R: 48
% change tbr : -3.9 : 4.1R: 0.0R: 2.1R: 9.1
Median Prices tbr : 230.9 : 227.7R: 243.4R: 229.3R: 245.3
Average Prices tbr : 298.6 : 298.9R: 314.1R: 287.6R: 301.2
FHLB Jul Jun May Apr Mar Feb
Avg Arm Rate tbr : 6.23 : 6.04 : 5.97 : 6.03 : 5.87
-By Rodney Christian; Dow Jones Newswires; 202-646-1880;
csstat@dowjones.com
Related fixed story numbers:
84697 US ECONOMIC INDICATORS: FWN Survey of Forecasters (STATS)
84698 US ECONOMIC INDICATORS: Latest 6 months (STATS)
80055-57 US MONTHLY ECONOMIC CALENDAR
USD Mixed Following Upbeat Data
The greenback was mixed at the start of a holiday-shortened week, with the UK market closed in observance of the summer bank holiday today – relinquishing earlier session gains above the 110-level against the yen and easing from the 1.47-handle versus the euro. The US economic data released this morning saw a higher than expected increase in July existing home sales, which reversed the 2.6% decline in June, increasing by 3.1% to 5.0 million units.
Traders will also digest several key reports slated for release on Tuesday, including the S&P/Case-Shiller home price index, the Conference Board’s August consumer confidence survey, July new home sales and the Richmond Fed manufacturing survey. The June Case-Shiller 20mm home price index is seen declining by 0.8% from -0.9%, while the 20-yy is expected to decline by 16.2% from a 15.8% fall previously. The Conference Board’s August consumer confidence survey is seen improving to 53.0, up from 51.9 in July. Meanwhile, new home sales for July are expected to remain steady, unchanged from June at 530k units.
Traders will also digest several key reports slated for release on Tuesday, including the S&P/Case-Shiller home price index, the Conference Board’s August consumer confidence survey, July new home sales and the Richmond Fed manufacturing survey. The June Case-Shiller 20mm home price index is seen declining by 0.8% from -0.9%, while the 20-yy is expected to decline by 16.2% from a 15.8% fall previously. The Conference Board’s August consumer confidence survey is seen improving to 53.0, up from 51.9 in July. Meanwhile, new home sales for July are expected to remain steady, unchanged from June at 530k units.
Saturday, August 23, 2008
Factors affecting currency trading
Although exchange rates are affected by many factors, in the end, currency prices are a result of supply and demand forces. The world's currency markets can be viewed as a huge melting pot: in a large and ever-changing mix of current events, supply and demand factors are constantly shifting, and the price of one currency in relation to another shifts accordingly. No other market encompasses (and distills) as much of what is going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.
Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[8]
Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [9]
"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[10] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.
Supply and demand for any given currency, and thus its value, are not influenced by any single element, but rather by several. These elements generally fall into three categories: economic factors, political conditions and market psychology.
Economic factors
These include economic policy, disseminated by government agencies and central banks, economic conditions, generally revealed through economic reports, and other economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices) and monetary policy (the means by which a government's central bank influences the supply and "cost" of money, which is reflected by the level of interest rates).
Economic conditions include:
Government budget deficits or surpluses: The market usually reacts negatively to widening government budget deficits, and positively to narrowing budget deficits. The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates the demand for goods and services, which in turn indicates demand for a country's currency to conduct trade. Surpluses and deficits in trade of goods and services reflect the competitiveness of a nation's economy. For example, trade deficits may have a negative impact on a nation's currency.
Inflation levels and trends: Typically, a currency will lose value if there is a high level of inflation in the country or if inflation levels are perceived to be rising. This is because inflation erodes purchasing power, thus demand, for that particular currency. However, a currency may sometimes strengthen when inflation rises because of expectations that the central bank will raise short-term interest rates to combat rising inflation.
Economic growth and health: Reports such as gross domestic product (GDP), employment levels, retail sales, capacity utilization and others, detail the levels of a country's economic growth and health. Generally, the more healthy and robust a country's economy, the better its currency will perform, and the more demand for it there will be.
Political conditions
Internal, regional, and international political conditions and events can have a profound effect on currency markets.
For instance, political upheaval and instability can have a negative impact on a nation's economy. The rise of a political faction that is perceived to be fiscally responsible can have the opposite effect. Also, events in one country in a region may spur positive or negative interest in a neighboring country and, in the process, affect its currency.
Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality," with investors seeking a "safe haven". There will be a greater demand, thus a higher price, for currencies perceived as stronger over their relatively weaker counterparts. The Swiss franc has been a traditional safe haven during times of political or economic uncertainty.[8]
Long-term trends: Currency markets often move in visible long-term trends. Although currencies do not have an annual growing season like physical commodities, business cycles do make themselves felt. Cycle analysis looks at longer-term price trends that may rise from economic or political trends. [9]
"Buy the rumor, sell the fact:" This market truism can apply to many currency situations. It is the tendency for the price of a currency to reflect the impact of a particular action before it occurs and, when the anticipated event comes to pass, react in exactly the opposite direction. This may also be referred to as a market being "oversold" or "overbought".[10] To buy the rumor or sell the fact can also be an example of the cognitive bias known as anchoring, when investors focus too much on the relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic policy, some reports and numbers take on a talisman-like effect: the number itself becomes important to market psychology and may have an immediate impact on short-term market moves. "What to watch" can change over time. In recent years, for example, money supply, employment, trade balance figures and inflation numbers have all taken turns in the spotlight.
Technical trading considerations: As in other markets, the accumulated price movements in a currency pair such as EUR/USD can form apparent patterns that traders may attempt to use. Many traders study price charts in order to identify such patterns.
Trading characteristics
There is no unified or centrally cleared market for the majority of FX trades, and there is very little cross-border regulation. Due to the over-the-counter (OTC) nature of currency markets, there are rather a number of interconnected marketplaces, where different currencies instruments are traded. This implies that there is not a single exchange rate but rather a number of different rates (prices), depending on what bank or market maker is trading, and where it is. In practice the rates are often very close, otherwise they could be exploited by arbitrageurs instantaneously. Due to London's dominance in the market, a particular currency's quoted price is usually the London market price. A joint venture of the Chicago Mercantile Exchange and Reuters, called FxMarketSpace opened in 2007 and aspires to the role of a central market clearing mechanism.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
The main trading center is London, but New York, Tokyo, Hong Kong and Singapore are all important centers as well. Banks throughout the world participate. Currency trading happens continuously throughout the day; as the Asian trading session ends, the European session begins, followed by the North American session and then back to the Asian session, excluding weekends.
There is little or no 'inside information' in the foreign exchange markets. Exchange rate fluctuations are usually caused by actual monetary flows as well as by expectations of changes in monetary flows caused by changes in GDP growth, inflation, interest rates, budget and trade deficits or surpluses, large cross-border M&A deals and other macroeconomic conditions. Major news is released publicly, often on scheduled dates, so many people have access to the same news at the same time. However, the large banks have an important advantage; they can see their customers' order flow.
Currencies are traded against one another. Each pair of currencies thus constitutes an individual product and is traditionally noted XXX/YYY, where YYY is the ISO 4217 international three-letter code of the currency into which the price of one unit of XXX is expressed (called base currency). For instance, EUR/USD is the price of the euro expressed in US dollars, as in 1 euro = 1.5465 dollar. Out of convention, the first currency in the pair, the base currency, was the stronger currency at the creation of the pair. The second currency, counter currency, was the weaker currency at the creation of the pair.
Retail forex brokers
There are two types of retail brokers offering the opportunity for speculative trading. Retail forex brokers or Market makers. Retail traders (individuals) are a small fraction of this market and may only participate indirectly through brokers or banks. Retail forex brokers, while largely controlled and regulated by the CFTC and NFA might be subject to forex scams[5] [6]. At present, the NFA and CFTC are imposing stricter requirements, particularly in relation to the amount of Net Capitalization required of its members. As a result many of the smaller, and perhaps questionable brokers are now gone. It is not widely understood that retail brokers and market makers typically trade against their clients and frequently take the other side of their trades. This can often create a potential conflict of interest and give rise to some of the unpleasant experiences some traders have had. A move toward NDD(No Dealing Desk), And STP(Straight Through Processing) has helped to resolve some of these concerns and restore trader confidence, but caution is still advised in ensuring that all is as it is presented.
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[7]. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.
Non-bank foreign exchange companies offer currency exchange and international payments to private individuals and companies. These are also known as Foreign Exchange Brokers but are distinct from Forex Brokers as they do not offer speculative trading but currency exchange with payments. i.e. there is usually a physical delivery of currency to a bank account.
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign Exchange Companies[7]. These companies' selling point is usually that they will offer better exchange rates or cheaper payments than the customer's bank. These companies differ from Money Transfer/Remittance Companies in that they generally offer higher-value services.
Money Transfer/Remittance Companies perform high-volume low-value transfers generally by economic migrants back to their home country. In 2007, the Aite Group estimated that there were $369 billion of remittances (an increase of 8% on the previous year). The four largest markets (India, China, Mexico and the Philippines) receive $95 billion. The largest and best known provider is Western Union with 345,000 agents globally.
Banks & Commercial companies
The interbank market caters for both the majority of commercial turnover and large amounts of speculative trading every day. A large bank may trade billions of dollars daily. Some of this trading is undertaken on behalf of customers, but much is conducted by proprietary desks, trading for the bank's own account.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Until recently, foreign exchange brokers did large amounts of business, facilitating interbank trading and matching anonymous counterparts for small fees. Today, however, much of this business has moved on to more efficient electronic systems. The broker squawk box lets traders listen in on ongoing interbank trading and is heard in most trading rooms, but turnover is noticeably smaller than just a few years ago.
An important part of this market comes from the financial activities of companies seeking foreign exchange to pay for goods or services. Commercial companies often trade fairly small amounts compared to those of banks or speculators, and their trades often have little short term impact on market rates. Nevertheless, trade flows are an important factor in the long-term direction of a currency's exchange rate. Some multinational companies can have an unpredictable impact when very large positions are covered due to exposures that are not widely known by other market participants.
National central banks play an important role in the foreign exchange markets. They try to control the money supply, inflation, and/or interest rates and often have official or unofficial target rates for their currencies. They can use their often substantial foreign exchange reserves to stabilize the market. Milton Friedman argued that the best stabilization strategy would be for central banks to buy when the exchange rate is too low, and to sell when the rate is too high — that is, to trade for a profit based on their more precise information. Nevertheless, the effectiveness of central bank "stabilizing speculation" is doubtful because central banks do not go bankrupt if they make large losses, like other traders would, and there is no convincing evidence that they do make a profit trading.
The mere expectation or rumor of central bank intervention might be enough to stabilize a currency, but aggressive intervention might be used several times each year in countries with a dirty float currency regime. Central banks do not always achieve their objectives. The combined resources of the market can easily overwhelm any central bank.[4] Several scenarios of this nature were seen in the 1992–93 ERM collapse, and in more recent times in Southeast Asia.
Market participants
Unlike a stock market, where all participants have access to the same prices, the forex market is divided into levels of access. At the top is the inter-bank market, which is made up of the largest investment banking firms. Within the inter-bank market, spreads, which are the difference between the bid and ask prices, are razor sharp and usually unavailable, and not known to players outside the inner circle. As you descend the levels of access, the difference between the bid and ask prices widens (from 0-1 pip to 1-2 pips for some currencies such as the EUR). This is due to volume. If a trader can guarantee large numbers of transactions for large amounts, they can demand a smaller difference between the bid and ask price, which is referred to as a better spread. The levels of access that make up the forex market are determined by the size of the “line” (the amount of money with which they are trading). The top-tier inter-bank market accounts for 53% of all transactions. After that there are usually smaller investment banks, followed by large multi-national corporations (which need to hedge risk and pay employees in different countries), large hedge funds, and even some of the retail forex market makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual funds, and other institutional investors have played an increasingly important role in financial markets in general, and in FX markets in particular, since the early 2000s.” (2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004 period in terms of both number and overall size” Central banks also participate in the forex market to align currencies to their economic needs.
Market size and liquidity
The foreign exchange market is unique because of
its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 3pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.
This $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe
its trading volumes,
the extreme liquidity of the market,
the large number of, and variety of, traders in the market,
its geographical dispersion,
its long trading hours: 24 hours a day except on weekends (from 3pm EST on Sunday until 4pm EST Friday),
the variety of factors that affect exchange rates.
the low margins of profit compared with other markets of fixed income (but profits can be high due to very large trading volumes)
the use of leverage
Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.As such, it has been referred to as the market closest to the ideal perfect competition, notwithstanding market manipulation by central banks. According to the BIS,[1] average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. Trading in the world's main financial markets accounted for $3.21 trillion of this.
This $3.21 trillion in main foreign exchange market turnover was broken down as follows:
$1.005 trillion in spot transactions
$362 billion in outright forwards
$1.714 trillion in forex swaps
$129 billion estimated gaps in reporting
Of the $3.98 trillion daily global turnover, trading in London accounted for around $1.36 trillion, or 34.1% of the total, making London by far the global center for foreign exchange. In second and third places respectively, trading in New York accounted for 16.6%, and Tokyo accounted for 6.0%.
In addition to "traditional" turnover, $2.1 trillion was traded in derivatives.
Exchange-traded forex futures contracts were introduced in 1972 at the Chicago Mercantile Exchange and are actively traded relative to most other futures contracts. Forex futures volume has grown rapidly in recent years, and accounts for about 7% of the total foreign exchange market volume, according to The Wall Street Journal Europe
The foreign exchange
The foreign exchange (currency or forex or FX) market exists wherever one currency is traded for another. It is the largest and most liquid financial market in the world, and includes trading between large banks, central banks, currency speculators, multinational corporations, governments, and other financial markets and institutions. The average daily trade in the global forex and related markets is continously growing and was last reported to be over US$ 4 trillion in April 2007 by the Bank for International Settlement
Friday, July 25, 2008
Forex Forecasting
Basic Forex forecast methods: Technical analysis and fundamental analysis.
This article provides insight into the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technician studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.
Technical analysis
Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.
Technical analysis is built on three essential principles:
1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.
Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:
* Indicators (oscillators, e.g.: Relative Strength Index (RSI)
* Number theory (Fibonacci numbers, Gann numbers)
* Waves (Elliott wave theory)
* Gaps (high-low, open-closing)
* Trends (following moving average).
Some major technical analysis tools are described below:
Relative Strength Index (RSI):
The RSI measures the ratio of up-moves to down-moves and normalizes the calculation so that the index is expressed in a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to be overbought (a situation in which prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).
Stochastic oscillator:
This is used to indicate overbought/oversold conditions on a scale of 0-100%. The indicator is based on the observation that in a strong up trend, period closing prices tend to concentrate in the higher part of the period's range. Conversely, as prices fall in a strong down trend, closing prices tend to be near to the extreme low of the period range. Stochastic calculations produce two lines, %K and %D that are used to indicate overbought/oversold areas of a chart. Divergence between the stochastic lines and the price action of the underlying instrument gives a powerful trading signal.
Moving Average Convergence Divergence (MACD):
This indicator involves plotting two momentum lines. The MACD line is the difference between two exponential moving averages and the signal or trigger line, which is an exponential moving average of the difference. If the MACD and trigger lines cross, then this is taken as a signal that a change in the trend is likely.
Number theory:
Fibonacci numbers: The Fibonacci number sequence (1,1,2,3,5,8,13,21,34...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retracement number.
Gann numbers:
W.D. Gann was a stock and a commodity trader working in the '50s who reputedly made over $50 million in the markets. He made his fortune using methods that he developed for trading instruments based on relationships between price movement and time, known as time/price equivalents. There is no easy explanation for Gann's methods, but in essence he used angles in charts to determine support and resistance areas and predict the times of future trend changes. He also used lines in charts to predict support and resistance areas.
Waves
Elliott wave theory: The Elliott wave theory is an approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave patterns shows a five-wave advance followed by a three-wave decline.
Gaps
Gaps are spaces left on the bar chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price of the day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. A breakaway gap is a price gap that forms on the completion of an important price pattern. It usually signals the beginning of an important price move. A runaway gap is a price gap that usually occurs around the mid-point of an important market trend. For that reason, it is also called a measuring gap. An exhaustion gap is a price gap that occurs at the end of an important trend and signals that the trend is ending.
Trends
A trend refers to the direction of prices. Rising peaks and troughs constitute an up trend; falling peaks and troughs constitute a downtrend that determines the steepness of the current trend. The breaking of a trend line usually signals a trend reversal. Horizontal peaks and troughs characterize a trading range.
Moving averages are used to smooth price information in order to confirm trends and support and resistance levels. They are also useful in deciding on a trading strategy, particularly in futures trading or a market with a strong up or down trend.
The most common technical tools:
Coppock Curve is an investment tool used in technical analysis for predicting bear market lows.
DMI (Directional Movement Indicator) is a popular technical indicator used to determine whether or not a currency pair is trending.
Unlike the fundamental analyst, the technical analyst is not much concerned with any of the "bigger picture" factors affecting the market, but concentrates on the activity of that instrument's market.
Fundamental analysis
Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately. Fundamental analysis focuses on what ought to happen in a market. Factors involved in price analysis: Supply and demand, seasonal cycles, weather and government policy.
The fundamentalist studies the cause of market movement, while the technician studies the effect. Fundamental analysis is a macro or strategic assessment of where a currency should be trading based on any criteria but the movement of the currency's price itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Many profitable trades are made moments prior to or shortly after major economic announcements.
This article provides insight into the two major methods of analysis used to forecast the behavior of the Forex market. Technical analysis and fundamental analysis differ greatly, but both can be useful forecast tools for the Forex trader. They have the same goal - to predict a price or movement. The technician studies the effect while the fundamentalist studies the cause of market movement. Many successful traders combine a mixture of both approaches for superior results.
Technical analysis
Technical analysis is a method of predicting price movements and future market trends by studying charts of past market action. Technical analysis is concerned with what has actually happened in the market, rather than what should happen and takes into account the price of instruments and the volume of trading, and creates charts from that data to use as the primary tool. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments simultaneously.
Technical analysis is built on three essential principles:
1. Market action discounts everything! This means that the actual price is a reflection of everything that is known to the market that could affect it, for example, supply and demand, political factors and market sentiment. However, the pure technical analyst is only concerned with price movements, not with the reasons for any changes.
2. Prices move in trends Technical analysis is used to identify patterns of market behavior that have long been recognized as significant. For many given patterns there is a high probability that they will produce the expected results. Also, there are recognized patterns that repeat themselves on a consistent basis.
3. History repeats itself Forex chart patterns have been recognized and categorized for over 100 years and the manner in which many patterns are repeated leads to the conclusion that human psychology changes little over time.
Forex charts are based on market action involving price. There are five categories in Forex technical analysis theory:
* Indicators (oscillators, e.g.: Relative Strength Index (RSI)
* Number theory (Fibonacci numbers, Gann numbers)
* Waves (Elliott wave theory)
* Gaps (high-low, open-closing)
* Trends (following moving average).
Some major technical analysis tools are described below:
Relative Strength Index (RSI):
The RSI measures the ratio of up-moves to down-moves and normalizes the calculation so that the index is expressed in a range of 0-100. If the RSI is 70 or greater, then the instrument is assumed to be overbought (a situation in which prices have risen more than market expectations). An RSI of 30 or less is taken as a signal that the instrument may be oversold (a situation in which prices have fallen more than the market expectations).
Stochastic oscillator:
This is used to indicate overbought/oversold conditions on a scale of 0-100%. The indicator is based on the observation that in a strong up trend, period closing prices tend to concentrate in the higher part of the period's range. Conversely, as prices fall in a strong down trend, closing prices tend to be near to the extreme low of the period range. Stochastic calculations produce two lines, %K and %D that are used to indicate overbought/oversold areas of a chart. Divergence between the stochastic lines and the price action of the underlying instrument gives a powerful trading signal.
Moving Average Convergence Divergence (MACD):
This indicator involves plotting two momentum lines. The MACD line is the difference between two exponential moving averages and the signal or trigger line, which is an exponential moving average of the difference. If the MACD and trigger lines cross, then this is taken as a signal that a change in the trend is likely.
Number theory:
Fibonacci numbers: The Fibonacci number sequence (1,1,2,3,5,8,13,21,34...) is constructed by adding the first two numbers to arrive at the third. The ratio of any number to the next larger number is 62%, which is a popular Fibonacci retracement number. The inverse of 62%, which is 38%, is also used as a Fibonacci retracement number.
Gann numbers:
W.D. Gann was a stock and a commodity trader working in the '50s who reputedly made over $50 million in the markets. He made his fortune using methods that he developed for trading instruments based on relationships between price movement and time, known as time/price equivalents. There is no easy explanation for Gann's methods, but in essence he used angles in charts to determine support and resistance areas and predict the times of future trend changes. He also used lines in charts to predict support and resistance areas.
Waves
Elliott wave theory: The Elliott wave theory is an approach to market analysis that is based on repetitive wave patterns and the Fibonacci number sequence. An ideal Elliott wave patterns shows a five-wave advance followed by a three-wave decline.
Gaps
Gaps are spaces left on the bar chart where no trading has taken place. An up gap is formed when the lowest price on a trading day is higher than the highest high of the previous day. A down gap is formed when the highest price of the day is lower than the lowest price of the prior day. An up gap is usually a sign of market strength, while a down gap is a sign of market weakness. A breakaway gap is a price gap that forms on the completion of an important price pattern. It usually signals the beginning of an important price move. A runaway gap is a price gap that usually occurs around the mid-point of an important market trend. For that reason, it is also called a measuring gap. An exhaustion gap is a price gap that occurs at the end of an important trend and signals that the trend is ending.
Trends
A trend refers to the direction of prices. Rising peaks and troughs constitute an up trend; falling peaks and troughs constitute a downtrend that determines the steepness of the current trend. The breaking of a trend line usually signals a trend reversal. Horizontal peaks and troughs characterize a trading range.
Moving averages are used to smooth price information in order to confirm trends and support and resistance levels. They are also useful in deciding on a trading strategy, particularly in futures trading or a market with a strong up or down trend.
The most common technical tools:
Coppock Curve is an investment tool used in technical analysis for predicting bear market lows.
DMI (Directional Movement Indicator) is a popular technical indicator used to determine whether or not a currency pair is trending.
Unlike the fundamental analyst, the technical analyst is not much concerned with any of the "bigger picture" factors affecting the market, but concentrates on the activity of that instrument's market.
Fundamental analysis
Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. In practice, many market players use technical analysis in conjunction with fundamental analysis to determine their trading strategy. One major advantage of technical analysis is that experienced analysts can follow many markets and market instruments, whereas the fundamental analyst needs to know a particular market intimately. Fundamental analysis focuses on what ought to happen in a market. Factors involved in price analysis: Supply and demand, seasonal cycles, weather and government policy.
The fundamentalist studies the cause of market movement, while the technician studies the effect. Fundamental analysis is a macro or strategic assessment of where a currency should be trading based on any criteria but the movement of the currency's price itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.
Many profitable trades are made moments prior to or shortly after major economic announcements.
Forex(FX) Trading Strategy
A forex trading strategy can provide profit for a skilled speculator. A FX trading strategy is, simply put, a method for using foreign exchange rates of currency from various countries to buy one country’s currency when it is undervalued, and exchange it for another country’s currency with it is of normal or higher value, with the difference being profit.
A common forex trading strategy could involve US dollars and the Euro, the official currency of most European countries. To use a simple example of a forex trading strategy, a speculator would buy Euros when they were undervalued; let’s say two Euros equaled one US dollar. This would be unusual because normally the two currencies are almost equal.
By spending one hundred US dollars to buy two hundred Euros a speculator would be able to buy more goods in Germany, France or other European countries. When the market changed and became more even, the speculator would have twice as many goods as he normally would have, and would be able to exchange those goods for US dollars once again.
The difference would be profit. This is a very simple explanation of a forex trading strategy, but gives the basics to the new speculator.Of course, when coming up with a forex trading strategy the trader should only use money that he or she can afford to loose. This is speculation, as opposed to investment. The chances for profit are real, and could come quick but if the market turns the opposite way than expected the trader could actually loose money.
A forex trading strategy can reap large profits, but if anyone tells you that all trades will result in profit, they haven’t studied the market as well as they should have and they are not correct. Still having a sound forex trading strategy for a competent businessman can be a profitable venture. It requires study of the markets, which takes time and is usually best accomplished by reading financial newsletters and using tools available on the Internet.
Getting the advice of a professional forex trading strategy specialist can also be a sound choice. Professionals have the time, education and skills and can generally help a trader come up with a forex trading strategy that will result in profit more often than one could do without their help.The most sound forex trading strategy options are generally used by large multinational corporations who are often able to make steady profits.
Watching what large corporations do who are involved in forex trading, looking for patterns they may have set, can help a trader to get the benefit of the very expensive expertise used by these large companies. Making watching of the large traders a part of a person’s education is definitely a good place to start a forex trading education. Identifying the state of the market, determining the time frame you are working in, and the currencies that have fluctuation and getting the advice of professionals through self study can be the wisest forex trading strategy option available.
A common forex trading strategy could involve US dollars and the Euro, the official currency of most European countries. To use a simple example of a forex trading strategy, a speculator would buy Euros when they were undervalued; let’s say two Euros equaled one US dollar. This would be unusual because normally the two currencies are almost equal.
By spending one hundred US dollars to buy two hundred Euros a speculator would be able to buy more goods in Germany, France or other European countries. When the market changed and became more even, the speculator would have twice as many goods as he normally would have, and would be able to exchange those goods for US dollars once again.
The difference would be profit. This is a very simple explanation of a forex trading strategy, but gives the basics to the new speculator.Of course, when coming up with a forex trading strategy the trader should only use money that he or she can afford to loose. This is speculation, as opposed to investment. The chances for profit are real, and could come quick but if the market turns the opposite way than expected the trader could actually loose money.
A forex trading strategy can reap large profits, but if anyone tells you that all trades will result in profit, they haven’t studied the market as well as they should have and they are not correct. Still having a sound forex trading strategy for a competent businessman can be a profitable venture. It requires study of the markets, which takes time and is usually best accomplished by reading financial newsletters and using tools available on the Internet.
Getting the advice of a professional forex trading strategy specialist can also be a sound choice. Professionals have the time, education and skills and can generally help a trader come up with a forex trading strategy that will result in profit more often than one could do without their help.The most sound forex trading strategy options are generally used by large multinational corporations who are often able to make steady profits.
Watching what large corporations do who are involved in forex trading, looking for patterns they may have set, can help a trader to get the benefit of the very expensive expertise used by these large companies. Making watching of the large traders a part of a person’s education is definitely a good place to start a forex trading education. Identifying the state of the market, determining the time frame you are working in, and the currencies that have fluctuation and getting the advice of professionals through self study can be the wisest forex trading strategy option available.
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